Personal Finance

Are you ready for an interest rate hike?

Central bankers tend to play their cards close to their chest. So when Andrew Bailey, governor of the Bank of England, says it “will have to act” to combat rising prices it’s tantamount to blatantly showing his hand to anybody who cares to look.

And look, they did. Responding quickly to Bailey’s comments last Sunday, financial traders brought forward their expectations of the first interest rate rise since 2007 to next month’s meeting of the BoE policy committee.

But that’s just the start. Another hike is widely forecast in December, with more in the first few months of 2022. The base raise could rise from 0.1 per cent now to 1.25 per cent or more by late next year — the highest level since the 2008 global financial crisis.

Moreover, far from leading the way, central banks are well behind the market. Driven by rising energy prices, bond yields have powered ahead, with the yield on the bellwether 10-year gilt rising from 0.5 per cent to 1.1 per cent in just two months.

Line chart of Bank of England bank rate and expectations* (%) showing Expectations for UK interest rates have shifted in recent weeks

So is it time to take heed of the governor and reshuffle our personal financial cards? Adjust our mortgages to lock in low interest rates and revise savings portfolios?

In truth, it’s still pretty hard to work out where we might be in a few months, with experts divided as to whether inflation is going through a temporary spike or starting a sustained surge. 

The same traders who’ve lifted their short-term rate expectations are still betting that rates will be fairly steady three years out — as 2021-22 rate hikes bite, the inflationary heat subsides and economic growth slows.

I think there’s more than a touch of wishful thinking involved in this benign outlook. It is, after all, pretty much what any sensible investor would want, given where we are today. A modest touch on the monetary brake, a slowing of the economic engine and a gentle manoeuvre out of inflationary trouble.

So it’s probably best to be prudent. At the very least, whatever happens to the UK and global economy over the next year, there is a clear sense that the ultra-low interest rates we have seen during the pandemic are on the way out. 

For borrowers, including mortgage holders, that’s obviously bad news. For savers with cash deposits, which means most of us, it may bring a bit of relief after long years of negative real returns.

So what to do? 

First, we should look at our debts, mortgages especially. High street lenders’ top offers have barely risen since the summer. For example, Halifax, Nationwide and Santander Bank were this week all offering five-year fixed rate loans at 0.99 per cent for up to 60 per cent of the property value. 

But Nigel Bedford, an associate director at, a big loans specialist, warns that this cannot last much longer. For equity release mortgages, which are something of a market weathervane as they often involve very long-term loans, lenders have already raised rates — to 2.8 per cent or so, from about 2.4 per cent a few weeks ago. 

Bedford says: “It is very likely that mortgage rates may well be at or near the bottom. So anyone thinking of taking a new mortgage deal should really act as soon as possible.”

There is no need to panic. Rates on those equity release loans were much higher pre-Covid at 3.5 per cent and more. But those with fixed-term loans coming to an end, should start applying for their next deal. Remember, you don’t need to wait until your current arrangements expire to begin preparations.

First-time buyers and those planning a big jump up the housing ladder are in a trickier position, as a more general rise in mortgage rates could cool the housing market and perhaps bring price cuts and buying opportunities. This is a difficult call, which will depend on personal and local circumstances as much as the overall market.

The flip side of higher borrowing costs should be better deposit rates. Good news for savers at last? Well, perhaps. Smaller banks, fighting more market share, have already been raising rates, with 1.3 per cent on offer this week for one-year deposits at BLME. 

But the big banks have not moved much. Nor has National Savings which offers a miserable 0.01 per cent on its income bonds. “So many savers have waited so long for a period of rate rises that they might have forgotten how sluggish the banks can be in passing them on,” says Sarah Coles of investment platform Hargreaves Lansdown.

So it might be best to look again at those start-up banks. They are, after all, covered by the same deposit guarantees as the likes of Barclays. Or, if you like a bit of risk, put a modest stake into crypto, even if bitcoin was this week trading close to all-time highs.

 As for investment portfolios, savers with the traditional balance between bonds and equities have seen their valuations suffer as gilt prices have fallen since the summer in line with the rise in yields. Equities have mostly moved sideways since early August, both in the UK and the US, the single biggest foreign market for British portfolio investors.

Line chart of Yield on two-year and 10-year gilts (%) showing Gilt yields power ahead

The standard advice in the face of rising inflation risks is to reduce bond exposure — except for inflation-linked instruments — and to switch equity holdings out of heavily-indebted companies (which would suffer from high borrowing costs) and into cash-generating businesses providing basic economic services that don’t go out of fashion, such as supermarkets. It’s one reason why the takeover race for Morrisons was so intense.

By the same argument, investors are often encouraged to pull back from growth-oriented tech companies — because the high future earnings on which they are priced are worth less if interest rates rise. 

But I wonder whether this time it will be a bit different. The tech revolution is so huge that it’s upending whole sectors. The Nasdaq index, the industry’s most representative signpost, has in recent months retained the gains made earlier in 2021 — and this week stood 19 per cent up on the year.

Ask yourself, how badly would Netflix really suffer in any likely inflation-induced economic hit scenario? How much would the electric car transformation that has powered Tesla be delayed? Of course, if the world economy — or the British — were on the verge of a serious shock, all bets would be off. But that’s not what the money markets appear to be signalling now.

Stefan Wagstyl is editor of FT Money and FT Wealth. Email: Twitter: @stefanwagstyl


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