Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THE Bank of England interest rate decision due this Thursday is a closer call than anyone expected just a few weeks ago.
On the one hand, the Bank is rightly worried about inflation and will want to take some steam out of the economy before price rises peak next year. On the other, it will know that its action on rates can only have a limited effect given that global supply chain problems and energy price rises - which are beyond the bank’s control - are major contributors to inflation.
If rates do rise, it will have an impact on our finances in several ways.
What an interest rate rise could mean for borrowers
Borrowing money in the UK right now is cheap - but if interest rates rise, that could soon change. A Bank of England interest rate rise is likely to be reflected in higher rates for mortgages and other kinds of debt at some stage, but different loans will be impacted in different ways.
The interest rates that you see advertised for new mortgages can be raised by lenders before the Bank acts, and the prices of the best new deals have already risen. Those borrowers on fixed-rate deals will not see their repayments rise but they will have to remortgage at some point - and face higher costs when they do.
Those on tracker rates or their lender’s standard variable rate - as well as those with other loan or credit card debts that are not fixed - may see an instant rise in their costs if the Bank acts on Thursday.
How much will an interest rate rise cost in extra repayments? That will depend on your rate now, the size of your outstanding loan and the term of the mortgage, but a borrower with £150,000 outstanding over a 15 year term, and currently paying a rate of 1.5%, would see their repayment climb by £16.98 each month if their rate were to rise by 0.25%.
What an interest rate rise could mean for savers
As with mortgages, the interest rates on savings accounts are controlled by account providers and do not have to rise just because the Bank rate does. However, a higher Bank rate should make it easier for providers to up interest rates to compete for savers’ cash.
Someone with £20,000 held in the current highest-paying easy-access savings account can get a 0.65% return on their cash right now, meaning they could expect £660 of interest on their money over the next five years. Were that rate to rise by 0.25% to 0.9%, their return would rise to £920.
What an interest rate rise could mean for investors
The impact on financial markets of an interest rate rise is much harder to quantify. Perhaps the most direct effect would be on the price of fixed-income investments, like bonds. Higher interest rates mean the return from risk-free assets like cash should rise and, as a result, bond investors will demand a higher return, or yield, from bonds to compensate for the further risk to their money. That means bond prices will fall.
The impact on the stock market is much less certain. In the recent past, share prices have fallen in sympathy when the bond markets have been wobbled by higher interest rate expectations. This time the stock market has remained calm despite the prospect of an interest rate rise.
That calmness may not hold and equity investors should expect volatility as the stock market processes central banks’ intentions.
What is volatility and risk?
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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