Rates rise, but sterling falls
Laith Khalaf, Senior Analyst, Hargreaves Lansdown comments on the Bank of England’s decision to raise interest rates:
‘This rate rise is about as much of a surprise as the Bake Off winner, and indeed markets have been pricing this in for some considerable time.
However, the initial reaction of the market didn’t go according to the script, with both the pound and gilt yields falling, showing that it’s often better to travel than to arrive. The reaction was probably in response to the dovish commentary surrounding the rate rise, with the MPC statement saying that future rate rises would be gradual and limited, and highlighting risks to the outlook, notably Brexit.
It’s a highly symbolic moment, as this rate rise has been ten years in the making, and it’s the first hike since the financial crisis prompted the central bank to take emergency measures to prop up the UK economy, by slashing rates and introducing QE.
In theory this is good news for savers and bad news for borrowers, but if we think back to the last time interest rates were at 0.5% (only last summer), this was hardly halcyon days of for cash savers, and borrowing was far from prohibitively expensive. Monetary policy was still very, very loose.
That remains the case today, and a rate rise doesn’t change conditions on the ground too much. Indeed banks aren’t likely to pass rises on to cash savers too quickly, preferring instead to boost their own coffers for as long as possible.
Looking forward rates are still expected to rise slowly and gradually, because the Bank of England doesn’t want to push UK consumers to far too soon. However these low rates will continue to provide cash savers with little protection from the onslaught of inflation.’