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Interest rate rise – what it means for investors

Yesterday, the Bank of England raised interest rates to 0.25%. Here’s what it could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Yesterday, the Bank of England (BoE) took the decision to raise interest rates from 0.1% to 0.25%. This is the first interest rate rise we’ve seen since August 2018.

We take a closer look at what the latest rate rise could mean for investors.

This article isn’t personal advice. All investments can rise as well as fall in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.

Why do interest rates matter?

The BoE uses interest rates as a tool to help control inflation in the economy. When inflation is high, interest rates can be raised to make borrowing more expensive and quell spending – the opposite is also true.

This time it’s slightly different to interest rate hikes we’ve seen in the past though, and that’s mostly thanks to the pandemic.

The pandemic forced the BoE to throw support the economy’s way to help keep it afloat. This was done through lowering the interest rate from 0.75% to 0.1%.

All these efforts, along with other measures from the government like the furlough scheme, did what they were meant to – the economy held up relatively well.

But we’re now at a point where things have picked up a bit too much, with ‘inflation’ taking centre stage. The latest inflation figures released yesterday for the 12 months to November 2021 showed inflation at 5.1%, up from 4.2% in October. This is the highest we’ve seen in ten years – the BoE weren’t expecting figures like this until spring.

Is this time different?

Historically interest rate rises haven’t been good for share prices, but now isn’t the time to panic. It’s important to remember that interest rate rises aren’t unusual, they’re part of a normal functioning economy.

It’s a tricky balance to not raise rates too much, to the point where it destroys spending and growth in an economy. After all, inflation is a sign of a healthy economy – but too much of anything good can start to cause problems.

With uncertainty looming with the rise of the omicron variant, the decision to raise interest rates is a firm stance from the BoE. The threat of a new variant might have been enough to resist the urge to raise rates before. But with inflation reaching decade highs, before expected, this time that doesn’t seem to be the case.

As an investor it’s important to look at the bigger picture.

Yes, rates have risen, but we shouldn’t get too carried away. In the wider scheme of things, rates are still well below what they were before the pandemic started.

How should investors react?

It’s the first time interest rates have risen in over three years, but we aren’t at pre-pandemic levels yet.

While we can’t be certain how markets will react, or if they’ll react rationally, it’s important to keep some key investing principles at front of mind, like holding a diversified portfolio and thinking long-term.

Having a diversified portfolio allows you to prepare when you can’t predict. If we could control how investments performed, the world would be a very different place. We can’t. But we can spread our money, to be ready for their unpredictability.

By investing in different types of companies, types of investments – like shares, bonds, and property – different parts of the world, or investment styles your portfolio will be well equipped.

And then when your investments do go up and down, provided you’ve spread them smartly, you won’t have to play guessing games or make rash decisions when things happen.

Prepare through diversification

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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