Bank of EnglandNov 8 2017

Don't panic over rules

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
comment-speech

Sounds dramatic, doesn’t it? Doubled. But when you are starting from such a low base – excuse the pun – as 0.25 per cent, a rise of 100 per cent was really the least we expected.

Yet this language, although accurate in every way, has been pilloried by some who think it is over-egging what has happened. To be fair, they have a point, since a 0.25 percentage point rise is unlikely to make a massive difference to many savers or borrowers.

However, when it comes to headlines and the number of column inches given over to this rise, the first in a decade since the credit crunch, there is little doubt that IFAs will be inundated with calls from worried clients. Mortgage rates for those on variable deals – not just the standard variable rate of lenders, but discounted or tracker rates – will see their costs increase.

It is hard to remember how most lenders deal with rate rises – they have not been around for so long – but the likelihood is that you will see a fair number of lenders passing on the rate in full and, most likely, in time for Christmas.

There is little doubt that IFAs will be inundated with calls from worried clients.

If you have a £150,000 mortgage on the standard variable rate of 4.5 per cent over 25 years, then a rise of 0.25 per cent would mean payments would increase by more than £20 per month, according to calculations from David Hollingworth of L&C Mortgages. Yet if you are on this kind of mortgage rate anyway, you really are paying way over the odds, as there are much better deals available.

As it happens, around 90 per cent or more of borrowers with L&C in recent years have been taking out fixed-rate mortgages. So, for the time being at least, they will remain unaffected.

The decision by the MPC to raise interest rates at this juncture does seem a little unclear. Usually we would see a strong economy and rising inflation, which would present the need to pull the interest-rate lever to try to put the brakes on. But the economy is not growing that strongly at the moment, and if the BoE is right and inflation is thought to have reached its peak in October – which we will find out in the coming weeks – there should be little need to address that either. But we have no way of knowing that yet for sure.

Since one of the main drivers for raising interest rates is to get the pesky inflation rate back under control, it would have been anticipated that a rise in the base rate would translate to a boost to the value of the pound to make imports cheaper. But in the immediate aftermath of the rate rise, the pound’s value actually fell, so will increase the cost of imports, potentially raising inflation still further.

At the time of writing, the pound had fallen from $1.33 against the US dollar at the beginning of 2 November, to $1.31 today, allowing for rounding. Against the euro, the pound was €1.14 at the beginning of the day on 2 November and had fallen to €1.12. In either case, it makes imports more expensive. And with Christmas on the horizon, which is one of the key retail periods of the entire year, it begs the question as to what people’s reaction will be.

Rising borrowing costs will mean they have to think about cutting costs elsewhere, but are enough people going to be affected soon enough for it to have an impact? Probably not. But with an uncertain future, thanks to Brexit also on the horizon,there is a chance that some may start playing safe, even in the longer term.

The one group who will be rejoicing is savers, who have significantly suffered at the hands of the banks who have taken every chance in the past decade to cut rates where they can. The government did not help by introducing the Funding for Lending scheme, which meant banks could borrow money from the government directly at very low rates rather than needing to entice savers with higher rates,so they would deposit money that could then be loaned to borrowers.

Over time, the influence of challenger banks who have shaken up the market and increased the rates available to savers has increased, and anyone now languishing on a poor rate from a high street bank really should be doing more to help themselves.

However, it will be interesting to see how many banks and building societies pass on this interest rate rise in full to their savers. Early signs are positive, with Coventry Building Society, Nationwide and Hampshire Trust Bank already having announced within hours of the rate rise that they are set to increase their variable rates across a number of accounts from 1 December.

Further rate rises are likely to be slow in materialising, and we are still way off the norm seen before the full impact of the credit crunch of a base rate of 2 per cent back in 2009. So, when IFAs say that little has happened, they might be right. But remember, that does not stop your clients worrying about it all the same.

Alison Steed is a freelance journalist