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What Does the Bank of England Raising Interest Rates Mean For Your Investments?

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As largely expected, today’s meeting of the Bank of England’s Monetary Policy Committee (MPC) resulted in the decision to incrementally raise the base UK interest rate to 0.75%. The immediate reaction to the development has been a 1% slide for the FTSE 100 today. However, pound sterling, despite an initial rise in the immediate aftermath of the announcement, quickly feel again and actually lost 0.5% against the dollar.

Taken in isolation, an interest rate rise would be expected to boost the pound. It had already largely been priced in by markets but a 0.5% drop can be considered a somewhat surprising reaction. However, a weaker pound would also be expected to benefit the FTSE 100 as most of its constituents earn much of their revenue internationally.

Investors may well wonder if and how today’s announcement and the market’s reaction may impact their UK-based investments, especially given the unorthodox movement of the pound and, to some extent, the FTSE 100 today.

The BoE’s MPC was, in contrast to May which saw a split vote and only three of the 9 members vote for what had been an expected rate rise than, unanimous in today’s decision. The reasoning provided by BoE governor Mark Carney was that low productivity, low net immigration and a tight jobs market are expected to combine to create inflationary pressure over coming months despite June inflation figures being lower than expected. This, it was argued, outweighs concerns that Brexit uncertainty means the UK’s economy is in too weak a position to absorb higher rates.

Quoted in the Financial Times, the British Chambers of Commerce head of economics Suren Thiru commented:

“The decision to raise interest rates, while expected, looks ill-judged against a backdrop of a sluggish economy”.

Mr Carney, on the other hand, argued that conditions of ‘perfect certainty’ were unrealistic and that waiting for them with regards to the base interest rate would be a mistake, stating:

“There’s a wide range of Brexit outcomes, but in many of them interest rates will be at least as high as they are today. So we don’t need to keep our powder dry for that.”

Pound sterling has lost 8% against the dollar since April. While a weaker currency can help the largest companies listed on the London Stock Exchange by boosting revenues and profits translated from other currencies it also increases the cost of imports, applying inflationary pressure. As such, an interest rate providing some support to the UK’s currency was thought to offer the best overall economic utility.

When it comes to the investing online into an ISA or SIPP, today’s announcement is unlikely to have a major impact on holdings. Brexit headwinds are proving far more influential at the moment when it comes to the value of the pound and economic confidence. Companies with high leverage, such as REITs and other property investment vehicles are likely to see overheads increase as the cost of borrowing goes up slightly. Financials stand to benefit.

Normally rising interest rates indicate an economic optimism that the consumer discretionaries sector would benefit from but in this case that is less clear as the wider economic outlook isn’t as solid as would normally be the backdrop to a hike.

Buying U.S.-listed equities or those denominated in other currencies would also be cheaper if the pound strengthens, though at this point it appears that will not be the case and the most optimistic scenario will be that some support against further Brexit uncertainty-fuelled losses is provided.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul