Evans Weir News - Trump and Brexit

Interest Rates – Rises on the Horizon?

The September meeting of the Bank of England’s Monetary Policy Committee gave the strongest signal yet that an increase in interest rates is getting closer.

Whilst the September vote saw a majority remain in favour of keeping rates at its long term historic low of 0.25%, the 7-2 result belies the real situation. The statement that accompanied the outcome made it clear that higher than desired inflation levels and positive growth figures may result in an increase in “coming months” perhaps before the turn of the year.

The elephants reading this will remember that early on in his tenure Bank of England Governor, Mark Carney, suggested that a key trigger for rate rises would be linked to unemployment rates. At that point, some 4 years ago, Mr Carney set what many thought quite a low target of 7% unemployment, and so when we consider that the latest statement from the bank came in the same week as unemployment rate hit 4.5%, it might suggest that a perfect storm is forming.

But what impact will an interest rate rise have? We should put this in context and understand that any rise is likely to be small, maybe quarter or half of one percent at best, and may be followed by a further period of no movement as the bank assesses the impact. So, many SMEs will not notice a huge change immediately. But with markets reacting positively to the hint of a change, the midterm effect may be a strengthening pound which will knock on to imports and exports. Long term commercial lending rates may start to rise, although many will argue that they never reflected the lows of the base rate and stuck stubbornly at 6% or more. But as we know, commercial rates go up like a rocket and fall like a (very slow) feather, so lenders will not need much encouragement to nudge their rates up.

Piecemeal rises in the base rate will gradually start to affect consumer spending, as mortgages begin to rise for the first time in nearly a decade, but the bank will monitor this carefully, aware that consumers have spent and not saved in recent times and therefore have little buffer behind them. Some home owners will never have experienced rising rates and household budgets will be pinched as a result.

The coming months will, in our opinion, continue to see careful wording from the bank of England, even if not accompanied by a rise itself. One thing can be sure, when the interest rates change you can either look at it that rates have doubled or rates moved to their second lowest ever position!