The Bank of England today announced the first interest rate rise in a decade, with the base rate up a quarter of a percentage point, from 0.25% to 0.5%.
The move had been widely expected and comes after last year’s cut from 0.5% following the Brexit referendum.
There was strong support for the move within the Bank, with the nine-person Monetary Policy Committee supporting it by a majority of seven to two.
As the move had been heavily trailed, market reaction was relatively neutral with sterling staying steady.
Symbolism ‘more significant than impact’
“The symbolism of this hike is more significant than its economic impact,” says Lucy O’Carroll, chief economist at Aberdeen Standard Investments.
She added that UK interest rates are still “exceptionally low” by historic standards, though the risk is that this could presage the start of a “cycle of rate hikes”, which could knock consumer confidence at a particularly vulnerable time for the economy.
Inflation has risen sharply, she said, but this is down to “temporary factors”, adding “the fact remains that wages are not increasing much and nor are underlying prices, so further substantial rate rises would not be warranted at this stage”.
Chase de Vere certified financial planner Patrick Connolly, pictured above, was more relaxed, saying that while “in theory” rising interest rates are “bad news” for stock markets, the rise had been “heavily signposted and priced in by markets”.
Further rises likely to be ‘slow and gradual’
He added that any further rises are likely to be slow and gradual, “so there shouldn’t be any nasty surprises”.
He pointed out, however, that an environment where individuals and businesses have less spare money because of the rise will be bad for some shares, “such as technology and consumer discretionary stocks”, which include non-essential purchases such as leisure and entertainment.
The rise would be likely, he said, to affect bond proxies, which provide a consistent level of income and have been bought by many investors as an alternative to expensive fixed-interest assets.
This would include shares such as “utilities and consumer staples like companies providing food, beverages and household items”.
“These companies can perform well in any economic environment,” said Collins, “but the value of their dividend stream becomes less attractive in a rising interest rate environment.”
However, he remained relatively upbeat, saying that there are many companies that can thrive in a rising-interest-rate-environment.
“This is especially the case,” he said, “when you consider that the UK has started to increase interest rates because the economy is looking in reasonable shape.
“This can provide a positive environment for companies to perform well and make profits,” while rising UK interest rates “will, in theory, make sterling stronger, which will benefit UK importers”, though it would be negative for UK exporters, he conceded.
Connolly wouldn’t be drawn on whether this was likely to be the first in a series of interest rate rise, saying that it is “incredibly difficult” to predict interest rate movements; “as we have seen over the past decade, many ‘experts’ have tried and failed”.
However, what he would state “with some confidence” is that any further rate rises are likely to be “slow and gradual”.
His advice to investors was, unsurprisingly, that they should hold a “balanced and diversified” investment portfolio including equities and fixed interest, which can help them to “achieve their objectives regardless of what happens to interest rates in the future”.