Michael Carrick

The interest rate rise: what it means for investors by Michael Carrick

14 Oct 2022

September 2022 saw the Bank of England make one of those decisions that no one looks forward to – an interest rate rise. Following several weeks of speculation, the decision marks the seventh consecutive rise in interest rates since the end of 2021 and the highest single rate since 1995.

With the financial rumour mill having gone into overdrive and countless predictions for the economy’s future being made on a daily basis, let’s step back from the furore and take an honest look at what it means for UK investors in practice.

Why have interest rates gone up?

An interest rate rise is in keeping with the Bank of England’s long-held philosophy of how best to deal with inflation. With inflation on the rise at what – for many – is an alarming rate, the hike in interest rates is an attempt to stabilise this increase.

The bank’s interest rate – also called a base rate – directly affect interest rates elsewhere, such as those you may have for mortgages or other loans.

When is the next interest rate decision?

Let’s focus on the positives here – the high-interest rates won’t last forever. Interest rate decisions are made by the bank’s monetary committee, on a six-weekly basis. This is a board of nine people, who judge the economic evidence and vote to decide whether the rate increases, decreases or stays the same.

Last month’s review saw a five-person majority vote for a 0.5-point rise, with interest rates increasing to 2.25%. The next review will be on 3rd November.

How long will the rise last?

It’s impossible to tell how long an interest rate rise will last, and economists and financial commentators can only review the evidence and make predictions based on their experience. It’s important to note that a huge number of external sources are responsible for inflation and in turn the rise of interest rates.

For example, the war in Ukraine has affected gas and food costs elsewhere. Importers are faced with hiked costs, which eventually trickle down to consumers. So there’s no single factor that can act as a magic inflation-reducer.

We also need to accept that there are unforeseen events ahead that can have a direct influence on prices. Instead of obsessing about the end of inflation, it’s a far better ploy to work on your wealth management with regard to the current situation.

Impact on borrowing

High-interest rates mean a rise in borrowing costs. Loans will likely come with a higher interest rate, and credit cards too as providers try to offset their own rise in costs. If you currently have a loan or credit card agreement, you’ll likely be on a pre-arranged payback rate. However, it’s wise to reassess your situation, simply to ensure that you’re 100% aware of any changes on the horizon.

Impact on savings

Be sure to check your specific situation with any personal savings or investments. Whilst some savings facilities may benefit from higher interest rates, these will likely be counterbalanced by the additional rise in living costs. As with borrowing, many savers may have previously arranged a fixed interest rate – double-check your own deal to make doubly sure.

There’s no point in being overly optimistic at times of rising inflation and interest rates, but a realistic review of your finances can certainly help ease the burden of rising costs. Don’t wait for any unpleasant surprises – dig out your calculator and investment portfolio, gauge your revised incomings and outgoings and speak with an Independent Financial Adviser before making any changes. And remember – nothing ever lasts forever, and even economic challenges have a shelf-life.

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