Higher rates on the horizon
Posted by: Titlesolv

 

In its eagerly anticipated decision on interest rates, the Bank of England’s rate-setting monetary policy committee (MPC) unanimously voted to leave rates at 0.5%. Although this pleased some, the Bank strongly suggested that the period of low interest rates and cheaper borrowing may be coming to a close.

 

In fact, the Bank's Inflation Report suggested that an increase could be coming from as early as May, as the UK economy benefits from worldwide growth. Such measures are necessary to counter high inflation “somewhat earlier and by a somewhat greater extent” than originally thought last year.

 

The announcement resulted in an increase of interest in remortgaging from households facing up to the first rate hikes in over a decade. Perhaps unsurprisingly, the proportion of customers searching for fixed-rate mortgages on Experian’s comparison site rose to over 67.4% in February, a jump from only 60.3% in December. Demand for fixing the rate, rather than opting for a variable tariff, jumped to 67.1% in November after the first hike.

 

The move also took many economists by surprise, with interest rates possibly rising by around 1% over the next two years after the Bank said that coming increases would be “earlier and greater than anticipated.”

 

Many observers have suggested that this shows that Britain will enter a formal rate-rise cycle in the near future. In another hawkish signal from Threadneedle Street, the Bank also said that inflation had to be brought down to 2% over two years rather than three. However, it opted to leave quantitative easing unchanged at £435 billion.

 

According to a poll conducted by Reuters after the policy announcement, a strong majority of economists (32 of 57) said it would raise its Bank Rate to 0.75% in May, alongside its next quarterly Inflation Report. After the same poll was conducted in January, only 13 of 71 economists had predicted a rate hike in for next quarter.

 

The policy decision came against the backdrop of the downbeat post-Brexit forecast published by the Bank before the referendum. However, Mark Carney, the Bank of England governor, has vigorously countered any criticism levelled at the Bank.

 

The governor said the Bank had got the “big picture” correct since the referendum. He stated: “In terms of the orders of magnitude, yes, we were slightly off on growth. But that was not entirely uninfluenced by the [Bank’s] actions.”

 

Before the June 2016 referendum, the Bank warned that the UK could face a technical recession after voting to leave the European Union. In the event, the economy continued to grow strongly.

 

As ever, only time will tell whether the Bank embarks on this path and what the impacts will be. Within the context of such uncertainty however, investors should seek to manage risk out of their portfolios. With title insurance, investors can be assured of a clean exit if the market demonstrates significant signs of distress.

 

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