Prepare your finances for more interest-rate rises

On Thursday last week, the Bank of England raised interest rates for the first time in just over ten years.

As endings of eras go, it was very much one of those “whimper, rather than a bang” sort of endings. Markets had expected it.

In fact, the pound withered somewhat, having been primed for more fireworks.

But the fireworks may be yet to come…

Mark Carney’s dislike of Brexit is clouding his judgement

The Bank of England’s rate-setting committee voted by seven to two to raise interest rates by a quarter of a percentage point, to a whopping 0.5%.

On the one hand, interest rates have doubled. On the other hand, they’ve doubled from an all-time low. More importantly, the fact that the base rate has doubled does not translate into a huge rise in virtually any other rate that matters.

Mortgage rates, for example, won’t double. Credit card costs won’t double. Corporate borrowing costs won’t double.

So all in all, not a big deal.

Not that you’d imagine that, judging by the way the Bank hedged its bets. The rate rise and the accompanying language was so timorous that the pound in fact fell, rather than rising (as you might expect), after the rate rise.

Summing it all up, the Bank is very gloomy about Britain’s future growth prospects. It’s pretty clear that the Bank of England governor, Mark Carney, has decided that Brexit is an irredeemably bad thing. Indeed, as far as Carney is concerned, it’s the explicit reason that the economy is sluggish rather than buoyant.

On Robert Peston’s show at the weekend, he argued that Britain would be “booming” if not for the uncertainty caused by Brexit. He even warned that a bad Brexit deal – which caused high inflation but low growth – could prevent the Bank from cutting interest rates in the future (despite years of evidence that proves that the Bank is more than capable of not giving a single hoot about inflation at all when it suits it).

I entirely understand that lots of people are very worried about Brexit and Carney socialises with many of them. But I’m not sure that taking a view on potential political outcomes (as opposed to actualities) is the role of the central bank.

For example, if Jeremy Corbyn got into power, you could easily argue that monetary policy might need to react to that in some way. But Carney would rightly be pilloried if he stuck his oar in on that front.

And when you think about it, it’s interesting that Mervyn King – Carney’s predecessor – clearly doesn’t feel remotely the same way about Brexit. You may have your own view on their respective competences as central bankers, but I do think it’s fair to say that it makes it clear that there’s more than one “right” view on these things.

Anyway, in all, there is something of a stern tone of “this is why we can’t have nice things” coming out of Carney’s mouth right now. And I suspect that it’s clouding his judgement on how much more sharply interest rates might have to rise in the future.

If you’re panicking about a 0.25% rise, you need to take action now

So, for now, while it doesn’t feel like rates will go up a lot more (though the market does still expect a few more rises), it’s worth using the breathing space to “stress-test” your finances against the potential for higher rates.

For example, I’ve seen the occasional person on Twitter panicking about the effect of a 0.25% rate increase on their mortgage (as well as the odd hysterical headline). If that’s you – and I know that most MoneyWeek readers will not be in this boat – then I’m going to say this as nicely as I possibly can, and I hope you take it the right way: if your finances are in the condition whereby a 0.25% hike in interest rates can cause you sleepless nights over your monthly mortgage payment, then you really, really shouldn’t have had a variable-rate mortgage in the first place.

So I suggest that you get down on your knees and pay heartfelt obeisance to whichever deity or unifying force you believe has been looking after you and your wallet all of this time, and then run off to a mortgage broker and nab yourself a fixed-rate loan before they all run out.

As I said though, that’s probably not your average MoneyWeek reader. And for the rest of you, well there’s not a lot to say.

If you’re nearing the end of a fixed-term mortgage, now is probably a good time to get remortgaging. As far as your savings go, the rise in rates won’t make enough difference to the interest on your savings to care about. Keep an eye out for rates creeping up, but there’s not much point in locking your money into a fixed-rate savings account, because rates are now hopefully on the upward path.

If you have money invested with “newer” forms of lender, such as peer-to-peer platforms, just keep a close eye out for rising defaults and other signs of stress. There has been a lot of “reaching for yield” in our low-rate world, and when the extremities start to rot and drop off, that’s when we know there might be trouble ahead.

Meanwhile, as far as your investments go, you can continue to enjoy the stockmarket “melt up” (particularly if you’re invested in Japan, which has been enjoying a scorching run recently). But be sure to revisit your asset allocation plans and rebalance accordingly if you haven’t done it in the last six months or so.

And check out my colleague Merryn’s thoughts on the topic here.