Emma Ann Hughes  

The Bank that cried rate rise

Emma Ann Hughes

Emma Ann Hughes

The UK has not seen an increase in its base rate for more than 10 years.

The Bank of England’s Monetary Policy Committee’s (MPC) announcement that it has opted to raise the base rate from 0.25 per cent to 0.5 per cent yesterday (2 November) didn’t come as a surprise but it did mark a significant moment.

A decade ago the first Thursday of the month used to have the financial services industry on the edge of their seats to see what would happen with the base rate.

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As the rate rise was announced there were lots of questions about whether this could mark the return to us all holding onto our hats and the start of a series of rate increases.

Back in 2008, when rates began to plummet I was buying a house and debating whether to fix – short or long-term – or opt for a home loan that tracked the base rate.

As the movement in the base rate had such an impact on me I vividly remember the remarks of the then governor of the Bank of England, Mervyn King.

Back then he observed rates could be raised again as swiftly as he had slashed them.

Even as recently as back in 2011, Mr King was warning that unless there was pay restraint, interest rates would quickly be raised.

So, should you be pointing back to Mr King’s words and bracing your clients for the impact of the base rate climbing again?

Well, Matthew Brittain, investment analyst at Sanlam, thinks you can reassure your clients they don't need to batten down the hatches for rocketing rates sending shock waves through the markets.

He said he believes inflation will return to target levels of its own volition, as the effects of a weak sterling dissipate. 

Mr Brittain said: “The UK remains in a precarious economic position with high levels of consumer debt and the Brexit negotiations delaying investment decisions, so we think that low interest rates are helpful in keeping the economy strong. 

“Assuming the inflation outlook stabilises, we think this is the first, and last, interest rate hike we will see for a while.”

Current Bank of England governor Mark Carney and the MPC's statement that accompanied the announcement the base rate would increase for the first time in a decade also suggests there is no rush to raise rates. 

To me, the sentence to note in the MPC’s statement is: “All members agree that any future increases in Bank rate would be expected to be at a gradual pace and to a limited extent”.

Rates are clearly set to stay low as uncertainty prevails, while the move in gilts which shot only slightly higher in price after the midday announcement, gives an insight into the market’s thinking. 

As observed by Adrian Hull, co-head of fixed income at Kames Capital, “this rate cycle is set to be a long and protracted affair”.