Spender, saver or investor - everyone is waiting with bated breath to see if the Bank of England raises its rates tomorrow (Thursday 2 November), as the market expects it will, and what the consequences will be.
Back in September Mark Carney, governor of the Bank of England, suggested that rates were likely to rise in the “relatively near term”. But the UK has gone for a very long time without a rate rise, the last time it went up was July 2007 when the rate went from 5.5% to 5.75%, an almost unimaginable figure these days.
The last time base rate was cut (from 0.5% to a record low of 0.25%) was August 2016 when the Bank acted to protect the economy in the aftermath of the Brexit referendum.
A record period of record low interest rates – it’s eight years since rates hit the first record low of 0.5% in 2009 – has had several significant effects on the economy and consumers.
Asset prices such as property and stocks have ballooned thanks to quantitative easing (QE), a process by which the government pumps money into the economy to keep it moving. QE was a measure implemented by the Bank in the wake of the financial crisis. With interest rates so low, banks are unable to yield much return on deposits and this reflects in the products they can offer.
Peter Thorne, senior financial analyst at Charles Stanley considers what an interest rate rise this week could mean for UK Banks: “Rock-bottom interest rates have been terrible for UK banks’ profitability, but any interest rate rise – which increases the amount they earn on interest free balances – could actually be a double-edged sword,” he says.
“Higher interest rates will boost UK banks’ net interest income but the equity market is increasingly concerned about the slowdown in the UK economy and the negative effects it could have on loan growth and bad debt charges which a rate rise might worsen.”
Are the savings tables turning?
Due to historic low rates, savings vehicles such as cash Isas and savings accounts offer very low returns. This was less of an issue before last year, but inflation has come back with a vengeance in 2017 and this has seen people’s income on savings eroded.
However, even just the hint of a rate rise seems to be stirring the savings market. Virgin money broke cover with table topping offers, and last week Ikano Bank did the same. This week PCF Bank has increased the rates on its five (2.42%) and seven year (2.5%) fixed savings accounts.
Helen Morrissey, personal finance specialist at Royal London says: “Speculation is mounting that the Bank of England will raise interest rates for the first time in a decade. Such a move would be welcomed by the many savers who have endured near non-existent growth on their cash savings during this time.
However, Ms Morrissey has a word of caution for borrowers: “Mortgage holders and those with credit card debt should take the speculation as a much-needed call to action. While any increase in interest rates this week would be small, it is also likely to be the first in several rate rises. If people have not already taken the opportunity to review their financial circumstances and look at whether they are using the products best suited to their needs then they would be well advised to make a plan sooner rather than later.”
Meanwhile, Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "Everyone is expecting a rate rise to happen tomorrow, whether it actually should or not as the Bank has backed itself into a corner. But with five-year Swap rates at 1 per cent the market thinks the average position of base rate over the next five years will be 1%, so there is no need for borrowers to panic.
"However, we are not sure this is actually the end of the cheap mortgage deals. While a number of lenders have increased rates slightly, Nationwide actually reduced its mortgage rates this week and the ultra competitive lending market remains. It may well be that some of any increase is absorbed into lenders’ margins because they are still chasing business. The plethora of new lenders on the market means there is plenty of competition for business and lots of choice for borrowers."
Doubts have been raised about whether base rate should in fact be raised. The reasons given are weak growth in wages, Brexit uncertainty and comparatively weak growth in the economy.
Weak wage growth coupled with a supply of easy credit has also fuelled consumer debt. Ultra-low interest rates have not helped this. In the event of a rate rise, many could see unsecured lending rates go up. An increase in interest rates could see defaults on credit shoot up, which would be bad for banks and bad for the consumers tipped over the edge.
Georgie Frost, head of consumer affairs at GoCompare, says: “Rising consumer debt levels is concerning for both the country and for individuals. We know from the FCA’s own report earlier this month that many people are already struggling. Half the population are said to be financially vulnerable with one in six unable to cope with a £50 increase in monthly bills.
“One area of particular concern is the increase in those using credit cards just to keep their heads above water. Long-term customers with expensive credit card debt are very profitable for firms who have little to no incentive to tackle the problem of over-indebtedness. A rise to the base rate of interest from the Bank of England this week could push many over the edge.
The same is true for those with variable rate mortgages. Moneywise reported last week, that a rate rise could add an extra £198 to your variable rate mortgage.
Whatever the Monetary Policy Committee (MPC) decide, new problems will arise, or old problems will stay the same. David Coombs, head of multi asset investments and investment manager at Rathbones has strong words for Mr Carney: "Real wage growth is negative, the housing market has softened and business investment has been listless – there seems to be little left to inject some life into the economy. Japan increased interest rates in the late 1980s to pop an inflationary bubble in asset prices. The result was deflation, recession and more than 20 years of poor economic growth.
"We think the Bank is behind the curve: it should have raised rates years ago when economic growth was stronger. Doing it now could be devastating to income-producing assets in the UK. It seems like Mr Carney’s rhetoric is aimed at bolstering the pound and thereby reducing cost-push inflation. But if he fails we could have even greater inflation and a recession at the same time."
Finally Mr Coombs adds of Rathbones' position in UK equities, "We remain very underweight the UK.”