Updated: Mar 17
Investment experts have long been forecasting a hike in interest rates and now the Bank of England has met their expectations, raising the base rate to 0.75%.
This is following a raise in the interest rate from 0.25% to 0.5% in February 2022.
The Bank has done this to bring down inflation, which currently stands at 5.5%, well above the Bank's target of 2%.
The last time our inflation was this high was in 1992, when a £3.6m transfer from Southampton to Blackburn Rovers made Alan Shearer England’s most expensive footballer and comedy gold Absolutely Fabulous first aired on BBC2.
That was a long time ago, so can anybody remember what effect the rise will have? What happens next?
The Bank of England expects inflation to be temporary, caused by the price of imported goods increasing due to Covid. Now, of course, the National Insurance hike and the lifting of the energy price cap can be added to the cost of living, which had already risen by 5.4% in December over the preceding 12 months.
Concerns about inflation have been exacerbated by Russia's invasion of Ukraine, as the Bank of England has sought to ease fears about the rising cost of living. Oil, food, and goods requiring metals to assemble could all see price rises due to the conflict.
Even if the rise in inflation is temporary, it may last longer than expected. The US Federal Reserve has raised interest rates for the first time since 2018, indicating that inflation is a global phenomenon.
This could be good news if you have significant cash savings, as you will now receive a better return. However, the ‘real return’ – which also takes into account the devaluing effect of inflation - could still result in the purchasing power of your cash decreasing.
Repayments on loans will also be higher to meet higher interest rates and those on variable rates will be hit first.
When interest rates increase, the stock market tends to decrease. However, at Reeves Independent, we have ‘hedges’ in the portfolio to combat this. Some examples of our 'hedges' include strategic bond funds, whose fund managers use derivatives to protect against inflation and currency risk. Other typical 'hedges' against inflation and rising interest rates include real assets and precious metals, such as gold.
Even though a change has only just been announced, there could be more on the way. If this happens, and you’re unsure about the consequences of these changes, consult your adviser for the best course of action.
This article represents the opinion of Reeves Independent limited only, is for information only and should not be seen as advice or a recommendation to take action. Investments can go down as well as up and you may not get back the original capital invested.
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