Interest rate rise: what will it mean for your money?

The Bank of England (BoE) today raised its key lending rate from the historic low of 0.25% to 0.5% after the Monetary Policy Committee voted 7-2 in favour of an increase.

This is the first rise since July 2007, and reverses the decision made last August to cut the rate following the UK voting to leave the EU.

The move is expected to result in higher mortgage payments for millions of households, but could also provide a modest boost to returns and the funding levels of defined benefit pension schemes.

“For schemes’ funding positions, in most cases, that depends on what happens to longer-term gilt yields, which won’t necessarily react in the same way,” Punter Southall investment consultant, Nick Harvey, said.

“The impact on funding positions also depends on whether there are more upward moves in the rate to come, and whether they arrive faster and/or are greater than the market is expecting.”

The decision to raise interest rates comes after inflation hit a five-year high of 3% in September, following a fall in the value of the pound after the Brexit vote.

The BoE said it expects this to peak above 3% in October, as the past depreciation of sterling, and recent increases in energy prices, continue to pass through to consumer prices.

This has been demonstrated in figures from the Office for National Statistics released last month showing that real wages are no higher now than they were in February 2006.

In addition, a report from the Resolution Foundation earlier this year revealed that the UK is experiencing its worst decade of real average earning in 210 years.

“Working people are paying the price for ministers' failure to get wages rising and to invest in jobs and services when interest rates were so low,” TUC general secretary, Frances O'Grady, said.

“Today's hike is a hammer blow for those in problem debt, whose repayments will now rise. With living standards falling, the economy needs boosting not reining in - the BoE has made the wrong call.”

The Monetary Policy Committee said it will monitor closely the impact of today’s increase, and that it is ready to respond to changes in the economic outlook as it aims to bring inflation back down to its 2% target.

References

http://www.theactuary.com/news/2017/10/interest-rate-raised-for-first-time-in-a-decade/

https://www.ft.com/content/322c7a70-bfc2-11e7-9836-b25f8adaa111?segmentId=3244cfff-ec81-8192-274e-ba1d3f036ca0