The Bank of England has raised interest rates for the first time in ten years, reversing the cut made in the wake of the Brexit vote. More important for investors and the markets is what happens next.
The first UK rate rise in ten years: what does it mean for investors?
Putting Brexit fears to one side, Britain appears to be doing just fine. Unemployment is at an all-time low, GDP growth in the third quarter surprised slightly to the upside and stock markets and house prices are at, or near, all-time highs.
The BoE finally reacted – ten years after the last rate rise – moving interest rates back to 0.5%, where they last were in June 2016.
However, sterling reacted badly, falling 1.5% against the US dollar on the day. The BoE’s commentary suggested that the financial markets had got ahead of themselves. A rate rise cycle will be very gradual indeed.
For consumers, this rate rise didn’t really matter. It was already priced into markets. What matters is when the next one is, which may not be for some time. The risk is that the market loses faith in the BoE, sending sterling lower and pushing up import costs.
Whatever happens to interest rates, in the meantime inflation will continue to look sticky. Cash on deposit continues to be eroded away.
Equities still represent the best long-term chance of making inflation-adjusted returns, but fixed income is beginning to look more attractive, particularly in the US where rate rises have been priced in. Large cap equities are proving a decent hedge against a weakening pound. When sterling falls, the FTSE 100 rises.
Brexit is still the great unknown, but markets have accepted this and sterling muddles through in a trading range. We don’t expect a breakthrough in negotiations anytime soon, the most likely result being a fudge that satisfies neither party in a year or so.