ASK THE EXPERTS

CAZENOVE CAPITAL’S PETER HILLIER JOINS US TO ANSWER A QUESTION ABOUT INTEREST RATE RISES.

WHEN WILL INTEREST RATES START TO RISE?

ANSWER: Interest rates touch all of our lives. They ultimately determine how much we pay for our borrowings and how much interest we earn on our savings. For much of the past decade interest rates have been at all-time lows.

This was because central banks cut rates in response to the global financial crisis. Now, almost one decade after the crisis reached its peak, the global economy is starting to recover. And so in certain parts of the world, such as the US, interest rates are rising. But what will happen to rates in the UK?

The Bank of England’s Monetary Policy Committee (MPC) sets the Bank Rate, which plays a key role in influencing household rates. Currently the Bank Rate is 0.5%, where it has remained for much of the period since 2009. Earlier this year it was expected that rates would pick up slightly in May. That didn’t happen because the MPC was concerned about the UK’s weaker-than-expected economic performance.

Now the Bank of England expects approximately three increases over the next three years. The financial markets – which price a variety of financial instruments linked to interest rates – puts a high probability of a rate increase as soon as August 2018. But we believe that if the UK’s economic performance continues to be weak, and overshadowed by a risk of a ‘hard Brexit’, the MPC may decide not to raise interest rates this year at all.

Even if rates are increased, the movements are likely to be small. The last rise was just one quarter of one percentage point – and it’s likely that future increases would be similar in scale. So even after three increases, the Bank Rate might hit 1.25% – still very low by historic measures. In periods of high inflation, such as the 1970s and 1980s, the Bank Rate was frequently higher than 10%, peaking at 17% in 1979.

But the economic backdrop is quite different today and for that reason we do not anticipate any sudden or dramatic increases. That said, borrowers should still prepare themselves for some increase, whilst for income-hungry investors, having a well-balanced portfolio is even more important.