CPD CoursesAug 18 2021

What could higher interest rates mean for your clients?

  • Understand why central banks cut or raise interest rates.
  • Learn about the impact this could have on asset prices.
  • Understand how the pandemic has altered the way markets may view higher interest rates.
  • Understand why central banks cut or raise interest rates.
  • Learn about the impact this could have on asset prices.
  • Understand how the pandemic has altered the way markets may view higher interest rates.
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CPD
Approx.30min
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CPD
Approx.30min
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CPD
Approx.30min
What could higher interest rates mean for your clients?

Peter Toogood, chief investment officer at Embark Group, is dismissive of the impact of the higher savings rate on the economic data. He says most of those who have built up savings are higher earners, who have a lower propensity to spend, while lower earners, who have a higher propensity to spend, have been hit financially. 

With this in mind, he does not believe growth in the real economy will rise substantially, necessitating an increase in rates. 

Gimber says the BoE’s current forecast is to raise interest rates to 0.25 per cent by the end of 2022. 

He says the central bank is more willing now than has been the case in the past to tolerate inflation, so he does not believe higher rates will be a significant consideration for clients in the medium term.

Gimber adds that the higher savings rate, and the fact many others who could not build up their savings were able to reduce their credit card debt or overdrafts, means “households will be much more able to withstand higher rates than has been the case in previous cycles”.

Toogood says a moderate interest rate increase would lead to “the price of bonds and equities falling”, but this would be short term, as central banks would likely respond to any fall by doing more QE, which would stabilise the asset prices.

This is what happened the last time there was an attempt to tighten monetary policy in 2013, when investors sold off bonds and equities in the wake of an announcement from the US Federal Reserve that it would begin tightening monetary policy.

The Fed subsequently changed its communication and markets rallied.   

Toogood says factors in the UK that kept interest rates low since the financial crisis, notably high levels of government debt, ageing demographics and technological change, remain in place and are likely to keep interest rates lower for longer. 

David Scott, investment manager at Andrews Gwynne in Leeds, is another who does not expect interest rates to rise much in the coming years, but says the most prudent thing to do right now is hold a larger amount of cash in portfolios than would be typical for a client at this time.

He says: “My expectation is that significant interest rate rises are the last thing governments or central banks want now. But I think whenever a rate rise comes, there would be the usual sell-off in bonds and equities. And what we are doing for our clients is allocating a bit more to cash now to take advantage of any moderate sell-off in equities or bonds in future."

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