This is why interest rates could rise faster than expected
Despite continued uncertainty around Brexit, there’s a growing expectation that interest rates could rise faster than previously expected.
The Bank of England Monetary Policy Committee held interest rates at 0.5% during their rate setting meeting last month. But at the same time they warned that interest rates will probably rise “somewhat earlier and by a somewhat greater extent” than expected at the end of last year.
The motivation for hiking interest rates is to tackle the threat of rising price inflation, fuelled by stronger global economic growth.
It was interesting to read that Schroders’ Economics team have upgraded their predictions for how major economies around the world will perform over the next couple of years. Here’s what they had to say in summary:
Donald Trump’s plan to boost the US government’s spending by $300 billion has added fuel to a US and global economy already firing on all cylinders.
The effect of the Bipartisan Budget Act of 2018, which detailed these plans (which also include a further $90 billion in disaster relief spending), will be felt far beyond the shores of the US.
As a result, we have increased our growth forecasts for almost all major economies around the globe.
It’s also caused us to change our predictions for the path of interest rates. By the end of 2019, we now expect US rates to have reached 3% and for the UK to hit 1.25%.
Looking specifically at interest rate forecasts, in the US Schroders say The Fed has now started balance sheet reduction (quantitative tightening) and with core inflation rising, they expect four more rate hikes in 2018, and two in 2019, ending the forecast at 3%.
Here in the UK, Schroders say the Bank of England is ready to hike faster due to concerns that supply constraints will cause inflation to rise.
They expect the Bank to raise interest rates once in 2018 and twice more in 2019 (to 1.25%). They predict 2018’s rate rise to arrive in November, but markets suggest it could be as soon as May.This forecast suggests UK interest rates could rise once in 2018 and twice more next year. Click To Tweet
Interest rate rises have implications for investors, savers and borrowers.
With the outlook for the economy, price inflation and interest rates still uncertain, it’s important to prepare for a range of outcomes, and position your personal finances accordingly for that uncertainty.
Investors will want to review their fixed income holdings within portfolios; rising interest rates mean lower bond values, especially for government debt and investment grade corporate bonds, which are more sensitive to rate rises.
Borrowers will want to model a range of interest rate rise scenarios, ensuring their debt repayments remain affordable and, ideally, taking action early to fix mortgage deals or pay off extra capital to reduce the financial impact of rising rates.
And savers should be periodically reviewing their savings accounts as interest rates continue to rise, avoiding any ‘complacency penalty’ and switching banks to benefit from more competitive deals.