The Bank of England is considering raising interest rates again.
This is an unfamiliar position. We haven't seen a lot of this in the last decade or so, barring a brief burst of hope in 2017 and 2018.
So why the shift, when might it happen, and what would it mean for your money?
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The recent history of interest rates in the UK
The Bank of England's key interest rate (Bank rate) hit its most recent peak of 5.75% in July 2007.
That was mere months before Northern Rock went bust, and we experienced a very visible bank run, with queues outside branches.
Northern Rock was just the canary in the coal mine, of course. The US subprime mortgage crisis took hold, Lehman Brothers went bust, and the real panic began.
Since then, rates across the globe have plumbed record depths, and the Bank rate has been no different.
To cushion us against the financial crisis, the Bank dropped rates to 0.5% by March 2009. In August 2016, just after we voted for Brexit, rates went all the way down to 0.25%.
The world had a brief period of optimism about growth returning in the years that followed. Rates went back up to 0.5% in November 2017, then up again in August 2018.
(In case this sounds dramatic, it's worth remembering that this was during a period when the Federal Reserve raised rates all the way from near-0% in 2015 to nearly 2.5% by the end of 2018).
Things looked wobblier in 2019 as China slowed. The Fed unwound about half of its rate hikes, while the UK stayed put. But we probably didn't expect to see fresh record lows for interest rates in the near future.
And then of course, coronavirus hit. In March 2020, Bank rate was slashed to 0.25% then to 0.1% in quick order.
That's where it's been ever since. But now it looks as though that might be changing soon.
Markets are now pricing in imminent rate hikes
Financial markets (which bet on such things) are now pricing in a hike in Bank rate from 0.1% to 0.25% in December. They also see rates hitting 0.5% by August.
Why the rush to reprice? There are two main reasons. Firstly, inflation is rising and it's rising more rapidly than the Bank of England had expected.
Secondly, the people who set interest rates (members of the Bank's Monetary Policy Committee) are now talking more aggressively about rate hikes.
Michael Saunders spoke to The Telegraph and noted that "markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that's appropriate." Saunders is known to be "hawkish" so this isn't much of a surprise.
But elsewhere he was backed up when Bank governor Andrew Bailey told The Yorkshire Post that "we are going to have a very delicate and challenging job on our hands". He warned that the Bank had to prevent high inflation expectations from "becoming permanently embedded because that would obviously be very damaging."
This is quite a tone shift. Not so long ago – only July in fact – Bailey was saying that we shouldn't "over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by premature tightening in monetary conditions".
What does this mean for your money?
What does it all mean? For all that markets have become terrified about the idea of interest rate rises, it's worth remembering what we're talking about here. The Bank of England rate is sitting at 0.1% right now, a record low. We're talking about raising it to 0.5% in about six months.
From a practical point of view, is that a catastrophe for the average "real" business or consumer in terms of borrowing costs? The answer has to be "no".
The biggest debt cost for most consumers is their mortgage and in about 80% of cases that's fixed (for the time being at least – if it's not, you might want to at least consider shopping around just now, given that there are still some incredible deals out there).
A bigger issue is that consumers and businesses both face the equivalent of much more aggressive rate hikes in the form of higher energy costs (money spent on heating can't be spent on going out or shopping) and higher taxes (money handed to the Treasury also can't be spent on fun things).
According to the latest survey from the British Retail Consortium, consumer spending still went up in September, but at a much slower rate than in August. People were unnerved by fuel shortages apparently. How much worse might this month be as people start to worry about their rocketing energy bills?
On the other hand, the Bank may feel that raising rates is worthwhile in order to prop up the pound and attempt to offset rising import costs with a stronger currency. It might also want to raise rates now so that it has the option of cutting them later if and when the economy starts slowing again (seems daft, but it's the way central banks think).
One key point to take away from all this as an investor, though, is this: the Bank is talking about rate hikes now because it's no longer confident that inflation is "transient".
So if you take any lesson from this, it's not that the Bank will be able to stop inflation in its tracks – it's that you should make sure your portfolio is set up to cope with permanently higher levels of inflation than we've seen for a while.
But it'll also be a big topic at this year's MoneyWeek Wealth Summit. We've gone virtual this year so you can tune in from the comfort of your own home. Make sure you don't miss it – get your ticket here (and the early bird deadline is nearly upon us so act now).
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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