As the economy continues to improve and unemployment continues to fall, there’s much speculation that we might see an interest rate rise sooner than many thought.
Despite the sustained economic recovery, wage growth has remained weak. As a result, the markets had been predicting that we wouldn’t see an interest rate rise until mid-2015. However, Mark Carney, Governor of the Bank of England, hinted in June that rates could rise sooner than the financial markets are expecting. The truth is that the Bank of England won’t tell us when the rise will come until it comes. But it’s safe to bet that it is coming, and the market view is that it might even be before the end of 2014.
But what will the interest rate rise look like? The Bank of England base rate has been at a record low of 0.5% for five years. The Bank has pledged that any rate rises will be “limited and gradual”. The general consensus seems to be that the rise will be in small increments and is likely to max out between 2-3%, still significantly under the 5% which became the norm in the run up to the financial crisis.
What does an interest rate rise mean?
In its simplest terms, an interest rate is usually good news for savers and bad news for homeowners with mortgages. However, it’s not quite a clear cut as that. There are no guarantees that the interest rates offered by banks, building societies and lenders will jump up at the same rate as the base rate, although it’s a reasonably safe bet that their rates will mirror the base rate to some extent.
An interest rate rise could be particularly tricky if wages fail to increase. For consumers with mortgages or other loans, if the cost of borrowing goes up and wages don’t, there may be little choice but to dip into savings or cut back on costs to make ends meet.
How to prepare for a rising interest rates
Although we can’t predict with any certainty when interest rate rises will happen (no one can!) it seems very likely to happen in the near future so now’s the time to take stock and prepare. Here are a few tips which you might find helpful:
1) Pay off your debts: if you have any smaller debts, like credit card bills, try to pay them off as soon as you can. This is advice for life, not just for when interest rates rise, but becomes particularly pertinent if a rise is imminent.
2) Review your credit cards: If you can’t pay off any more of your credit card debt each month, move it to a 0% interest rate card where the 0% rate is fixed for as long as possible. Work out how much you need to pay off each month to clear the card before this rate ends and stick to it.
3) Review your mortgage: if you’re currently on a tracker or variable mortgage, it might be a good time to fix your rate before the base interest rate goes up. A rise in the base rate is likely to also result in a rise in your mortgage lenders’ interest rates. It’s a good idea to do this for other loans, such as a car loan, too. If you’re in the market for a new home or car, it might be time to step up your search so you can get everything agreed before rates rise.
4) Think long term on savings: If you’re shopping around for a savings account, now is the time to accept a lower yielding savings plan with a shorter term. If you fix into an account which is currently paying a good rate, you might find that this deal looks less and less attractive as interest rates rise around you. Flexibility is helpful at the moment.
5) Invest in stocks: Consider purchasing stocks of major consumers and raw materials. The cost of raw materials often remains stable or even drops with interest rate rises, giving these companies the benefit of increased profit margin. Construction and also some food producers (beef, for example) also benefit from increased consumer spending so could be good choices.
6) Invest in a bond ladder: A bond ladder is a series of bonds that mature at regular intervals, such as every three, six, nine or 12 months. As rates rise, each of these bonds is then reinvested at the new, higher rate.
7) Consider investing in the USD: When interest rates start to rise, the Dollar usually gains momentum against other currencies because higher rates attract foreign capital to investment instruments that are denominated in dollars.
As you can see, there are quite a lot of things to consider so taking a broad view on all your spending, savings, investments and borrowing is important. It might be a good time to pop in and see us for a full financial review. Get in touch to find out more.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
GreenSky Wealth Ltd is an appointed representative of Financial Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 516410