Investments  

Bank raises base rate to 0.75%

Bank raises base rate to 0.75%

The base rate rose to its highest level since the financial crisis this afternoon, with the Bank of England increasing it to 0.75 per cent.

The decision on whether or not to raise the base rate is taken by the nine person Monetary Policy Committee, which is chaired by Mark Carney.

All nine members of the committee voted to raise the rate.

Frances Haque, chief economist at Santander UK, said the decision to increase rates to 75 basis points, was widely expected by both the market and commentators, given that the economic data published, so far, for the second quarter of 2018 showed marked improvement on the first quarter.

He said: “Now that we have had one Bank Rate hike in 2018, it brings into question when the MPC will consider the next one, given its previous comments on following a slow and steady path to hiking.  However

"Whatever the timing of this the MPC will continue to assess the underlying economic data going forward and the timing of such a hike will be dependent on this."

Sajiv Vaid, a fund manager on the Fidelity Moneybuilder Income fund said putting rates up was an “unnecessary risk.”

He said that while economic growth has picked up since the start of the year, it remains at a low level by historic standards.

Mr Vaid added that the fall in unemployment has not led to higher inflation as might have been expected, denting the case for an interest rate rise.

Andy Haldane, chief economist at the Bank of England, had previously explained his rationale for voting to put rates up.

He said if inflation is above target but rates are low, this encourages excessive borrowing in the economy, which, in his view, leads to a deeper financial crisis than that which occurs if rates are put up to early and economic growth slows.

Ben Yearsley, director at Shore Capital, said: “From an investment perspective, the direct impact of the rate increase can be split into three areas; currency, bond yields, and discount rates.

"From a currency perspective, if the markets think this is the first of a series of rate increases then sterling should strengthen as more international money backs the pound.

"This will have two potential side effects. Firstly it will cause the value of your overseas investments in sterling to fall, but it will mean that if you allocate more money to overseas investment then your pound buys you more.

"The second thing that would happen in this scenario is that the FTSE would probably fall as it does better under a weaker pound.

"Bond yields will obviously start to rise, which means capital values will fall. Again, this is good news if you are looking at allocating new money to bonds as your coupon (income) should be higher,  it its bad news for many existing bond investors.

"Finally, discount rates - this is part of a mathematical equation that many in the city use to value companies. Basically they look at the risk free rate of return, i.e. base rates or Gilts for example, and use it to help value a company: the lower the risk free rate the higher value can be ascribed to a company.