Bank of England Holds Interest Rates… What Does It Mean For Savers & Investors?

Following the latest meeting of the Monetary Policy Committee the Bank of England has decided to hold the UK interest rate at 0.5%. In this post we will consider what this means for savers and investors.

The decision to keep interest rates at 0.5% went contrary to what many experts had been predicting as recently as March – and also contrary to hints by governor Mark Carney last autumn – that rates would rise this spring, even if only marginally to 0.75%, in order to rein in inflation.

The Bank of England, whose Monetary Policy Committee members voted for the hold by a majority of seven to two, gave a few interesting reasons for their decision. The Bank said that the UK economy has hit a “temporary soft patch”, as it cut the forecast for UK economic growth from 1.8% to 1.4% this year – the weakest since 2012. However, it said this reduction was mainly due to disruption to the economy caused by March’s bad weather – the so-called ‘Beast from the East’. Mark Carney said that “the underlying pace of growth remains more resilient than the headline data suggest.”

Back then to the implications for savers and investors:

For Savers. After the interest rate rose very marginally from 0.25% last November rates for savers remain dismally low. So savers hoping for better returns on their money might want to consider a financial health check right now. They might look at other uses for money they don’t need to hold in cash, such as longer term investments or pension planning.

However, savers should keep an eye on the outcome of Monetary Policy Committee meetings this September and November. Many commentators believe an interest rate rise is still likely to happen during the autumn.

For Investors. Market reaction following the interest rate announcement was broadly in line with what experts normally expect. Sterling fell 0.5% against the dollar and 0.75% against the euro, while the FTSE 100 index rose 0.5% ending the day at a three month high.

Investors with equities should bear in mind that current low interest rates are partly responsible for buoyant stock markets around the world. But the relationship between interest rates and equities is intricate, so small rate rises are likely to mean equities remain popular. Investors with bonds should bear in mind that the relationship between interest rates and bond rates is more closely coupled. A rise in interest rates normally sees bond prices fall while yields rise.

Very importantly, however, investors should bear in mind that any interest rate rise this autumn is likely to be very small. So any actual rise may not change the prospects for their investments much. But, rumours of upcoming rate rises also exert an influence of course.

The best description of the current situation is that it is ‘certainly uncertain’ …. especially as the Bank has suggested several times over the last few years that rates would be rising soon, but only actually delivered on those hints once. It certainly underlines the importance of reviewing your savings and investments regularly, taking good investment advice, and of having a properly diversified portfolio.