My first rate rise
03 Nov 2017 - Estimated reading time: 2 minutes
So interest rates do go up after all. Some of my older (or as they would say “more experienced”) colleagues have lived through interest rates at 15% - or so I’ve been told – rendering yesterday’s 0.25% rise a drop in the ocean in comparison. As for me, having seen interest rates only go one way since I left university, rising rates are an alien concept! On a personal note, my small savings will see a welcome boost, however the price of my mortgage (when I hopefully buy my first flat next year) has risen. The key question for me is whether the price of any mortgage is likely to rise further before I can put down that all important deposit?!
Yesterday’s decision by the Bank of England will have surprised few after the intensive preparation put in by Mark Carney in advance. Gilt yields and sterling fell on the announcement. Not necessarily a surprise given that markets discount news in advance – it’s the second differential that matters – but perhaps counter-intuitive for many casual observers and the un-initiated. Either way, the bigger picture points to further rate rises in the future as yields remain near historic lows; both nominal gilt yields and the real yields on index-linked gilts are little changed from their levels at the start of 2017.
Sterling’s collapse post referendum has resulted in an uptick in inflation, with September’s headline inflation of 3.0% p.a. at its highest level in five years. While headline inflation has continued to rise, GDP growth and real wage growth in the UK have remained subdued. The upshot of this is that any future rises in interest rates are likely to be gradual. Anything other than gradual and my first steps on the property ladder may be in jeopardy! In the meantime, Trustees and Pensions Managers can only dream of a base rate pushing into the mid-teens, sending funding positions soaring upwards as liabilities are discounted through the floor.
Who knows, maybe interest rates will be back up at 15% by the time I’m “more experienced”!