Features

A whole generation is about to learn that interest rates don’t just go down

Interest rates may have risen, but they’re still lower than at virtually any time in history. The only way is up, says John Stepek. Here’s what that means for you.

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The Bank of England has raised interest rates, for only the second time since 2007.

The first time came in November 2017, when the Bank reversed its post-Brexit panic cut. The bank rate rose from 0.25% to 0.5%.

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Now it's at 0.75%. So it's higher than at any point since February 2009 (when it was 1%).

But it's also still lower than at any point in history before then. By "any point", I mean roughly 5,000 years, if Bank of England chief economist Andy Haldane's research is correct.

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So what does it all mean?

Interest rates really should be a lot higher than they are now

The Bank of England's monetary policy committee (the nine people who set the price of money in the UK) voted unanimously to raise the bank rate to 0.75% yesterday. That's a rise of a quarter percentage point, or 25 basis points, to use the City jargon.

The way some commenters react, you'd think this was a radical shift. My inbox is full of people (usually those with vested interests, admittedly) saying that the Bank shouldn't be too hasty.

Yet, at 0.75%, we are just a single quarter of a percentage point higher than we were back in March 2009, when central banks around the world hit the panic button and slashed interest rates hard. Back then, 0.5% was deemed an "emergency" rate. That is one long emergency.

Also, it's worth noting and I've talked about this before, so I won't labour the point but on any historical measure, interest rates are well below where they "should" be.

The Bank of England's own calculations point out that if bank rate were to "revert to the mean" (ie the average level) of the 20th century, then it would already be at around 3%.

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The UK is at full employment. You can quibble about whether the jobs are any good or not, and it's certainly the first thing a lot of people throw at you when you discuss this. But at the end of the day, the unemployment rate is at its lowest in decades.

(Oh, and if you are irritated by the gig economy a stance with which I have some sympathy you should understand that it is specifically global zero-interest-rate policy that has enabled most of these business models to thrive in the first place.)

Wage inflation isn't rocketing. But at this rate, it's hard to see how employers can continue to recruit people without pushing compensation up. Moreover, as my colleague Merryn Somerset Webb has pointed out, the cost of employing staff is rising sharply.

The economy isn't booming. But nor is it in recession. House prices are finally stalling, but that's a good thing. And we really are only talking about a quarter point here.

So if we can't cope with this, then you do have to wonder what can we cope with?

What the quarter-point interest rate hike means for savers and borrowers

Anyway, that's the theory part. But in practical terms, what does it mean for you right now?

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Long story short, you'll get a tiny bit more interest on your savings. If you don't, then you might want to shop around for a new provider. Remember that the current inflation rate (as measured by CPI, the Bank's official target) is 2.4%, so you probably still won't get a real return, but at least it's edging closer.

And yes, shopping around is a (minor) hassle and I don't blame you if you can't be bothered, but if you have a fair chunk of cash, you should probably think about it.

On the mortgage front all I can really say is that the direction of travel seems pretty clear. You can be as gloomy as you want about the future of the UK economy, the prospect of Brexit disruption, fear of an "overdue" recession, and so on. Maybe things will go pear-shaped, and maybe the Bank will use that opportunity to cut rates again. It's not impossible.

But don't lose sight of the fact that rates even at the lofty heights of 0.75% currently remain very low indeed. In the 100 years prior to the 2008 financial crisis (that's as far back as the Bloomberg terminal is giving me right now), the UK base rate had never, ever gone below 2%.

Two percent. More than twice today's rate. Can you imagine the wailing, the gnashing of teeth, the sheer apocalyptic terror of such a vertiginously high rate today?

So my point is this: some of you (you lucky striplings, you) may well have lived your entire adult life without seeing a UK base rate above 1%. But that is an abnormal situation.

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So if you are renewing or taking out a mortgage today, you can do one of two things. You can take a variable rate, or a short-term fix, betting that rates will stay flat or fall by the time you next shift mortgage. That runs the risk (to be very clear a risk, not a certainty) of a nasty surprise when you next come to remortgage.

Or you can consider locking in for a bit longer. That runs the risk of kicking yourself at some point in the future if rates do happen to fall. Of course, given that rates can't fall that far from here, I struggle to imagine that the severity of that self-administered kicking will be particularly great but only you can answer that.

We'll be looking at how the "best buys" have changed in next week's issue of MoneyWeek magazine, out next Friday may I humbly suggest that you subscribe here if you haven't already.

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