Will the Bank of England raise interest rates soon?

A Bank of England policymaker has dismissed talk of rising interest rates, following speculation from financial experts.

The latest figures from the Office for National Statistics show that UK GDP grew 0.7 per cent in the final quarter of 2016, compared to the previous quarter, in line with expectations.

Agate Freimane, Senior Investment Director at BrickVest, comments: “Since the Brexit vote, the Bank of England has cut interest rates and boosted quantitative easing. The latest GDP growth and inflation numbers show signs that these measures have worked and if this trend continues, the Bank of England will start to raise interest rates, which is likely to have a negative impact on real estate. Higher inflation means higher construction costs, leading to an increase in real estate prices. However since Brexit, the demand for real estate has softened and it is unlikely that developers will immediately pass on the higher inflationary costs to the end customer.”

Despite the economy still showing some signs of growth, though, a member of the Bank of England’s Monetary Policy Committee has said that a rise in interest rates is unnecessary, due to squeezed consumer finance.

Speaking in London this week, Gertjan Vlieghe, a member of the Bank’s Monetary Policy Committee, said that financial markets had overestimated the odds of an interest rate hike in the coming year. The latest meeting by the MPC saw only one of the nine members vote to increase rates.

Vlieghe emphasised that there has been “no sign of sustained upward momentum yet”, adding that “despite better than expected growth, we have not had higher-than-expected underlying inflation pressure”.

 

Good news for borrowers as Bank of England holds interest rates low

3rd February 2017

The Bank of England announced yesterday that it will keep interest rates at their record low of 0.25 per cent, which will be welcomed be many applying for mortgages.

The Bank’s Monetary Policy Committee (MPC) regularly meets to set monetary policy, at the moment to meet the country’s 2 per cent inflation target, “in a way that helps to sustain growth and employment”. At its meeting ending on 1st February 2017, the Committee voted unanimously to maintain Bank Rate at 0.25 per cent. This follows the reduction of the Bank Rate from 0.5 per cent last year, in the wake of the UK’s vote to leave the European Union.

According to research by MoreThen, the cost of a mortgage, along with bills, currently takes up an average of 45 per cent of Britons’ take-home income, almost half of their monthly earnings. This, however, is based on historic low mortgage rates, which are kept low by lenders at a time when financing is affordable. With the US Federal Reserve now expected to increase its interest rates several times in 2017, following a hike at the end of 2016, though, the UK is thought to follow suit in the near future.

Ishaan Malhi, CEO and Founder of online mortgage broker Trussle, says:
“The Bank of England appears to be adopting a ‘wait and see’ approach to interest rates, refraining from any hike until it’s certain consumers and businesses can handle one. This is great news for hopeful first-time buyers, who are being given more time to take advantage of extremely low mortgage rates as they climb onto the property ladder. The Bank of England’s strategy should also be welcomed by existing mortgage holders looking to switch to a more suitable deal. There are currently three million UK homeowners on a Standard Variable Rate mortgage, paying an average of £3,500 above the leading market rate every year on their mortgage. Despite today’s announcement, remortgaging should still be a priority for these people. Thanks to vast technological improvements in the mortgage sector, switching has become a straightforward and stress-free experience.”

The value of sterling remains 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU. Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target. This effect is already becoming evident in the data. CPI inflation rose to 1.6% in December and further substantial increases are very likely over the coming months.

As the MPC had observed at the time of the UK’s referendum on membership of the EU, the appropriate path for monetary policy depends on the evolution of demand, potential supply, the exchange rate, and therefore inflation. The Committee’s latest economic projections are contained in the February Inflation Report. The MPC has increased its central expectation for growth in 2017 to 2.0% and expects growth of 1.6% in 2018 and 1.7% in 2019. The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the Chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households. Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum. Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow.
 

1 in 4 borrowers understand how Bank of England base rates affect them

14th December 2016

The US Federal Reserve is expected to announce plans to raise interest rates this week, as sentiment surrounding the country’s economy improves. Such a hike would also fuel speculation around changes in the UK’s own base rate, despite the fact that the Bank of England reduced it to a new all-time low of 0.25 per cent in August, following the country’s Brexit vote.

Base rate changes are an important thing to consider, when it comes to the housing market, as they can impact mortgage rates. However, new research from Trussle shows that just one in four borrowers understand how the Bank of England’s base rate affects their monthly payments.

Tracker rates dropped by 0.25 per cent in line with the BoE’s action this summer, while fixed rates also hit record lows, with two-year fixed rates available for as little as 1.39 per cent. However lender SVRs, the ‘default’ rates that borrowers often find themselves on as soon as an initial rate has ended, did not drop nearly as far. The average SVR before August’s base rate change was 4.8 per cent, but by November had fallen only 0.17 per cent to 4.63 per cent.

As a result of the widening gap between the best and worst rates on the market, people stuck on expensive Standard Variable Rates (SVRs) could now save a further £380 per year by switching to a market leading fixed rate. What had been an average annual saving of £3,120 has grown to £3,500, as a result of August’s base rate cut.

While 27 percent of mortgage borrowers in Trussle’s study, which was carried out by YouGov, knew how a cut to the base rate would affect their own mortgage payments, there was a huge disparity between male and female borrowers. 35 per cent of men claimed to understand the relationship, compared to just 19 per cent of women.

Ishaan Malhi, CEO and Founder of Trussle, says: “The mortgage sector is shrouded in a level of complexity and jargon that continues to discourage borrowers from acting swiftly to secure a better deal. The base rate is the most significant factor affecting mortgage rates, so it’s a shame that so few understand its effect on the most important financial commitment of their life.”

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Brits buck base rate low with more savings than ever

4th November 2016

The base rate may be at a record low, but Brits are saving more money than ever before. A new poll from Nationwide Building Society, which was conducted to determine the effects of a sustained period of low interest rates on savings attitudes, shows that around half of people have more money saved away now than they did in 2009.

This figure, according to the research, is just £5,000 short of the amount Brits feel they need in reserve to feel secure (£21,313).

Despite the low interest rate set by the Bank of England, the vast majority (90 per cent) still put money away whenever they can, with more than two in five (44 per cent) managing to put money aside regularly. Encouragingly, more than half (51 per cent) of savers say low rates have had no effect on their intention to save.

But even with strong savings behind them, more than two in five people (42 per cent) say they plan to start saving even more. According to the research, the main reason for putting money away for nearly three quarters (71 per cent) of savers is not about returns from interest, but to ensure they have a nest egg available should it ever be needed in an emergency.

And for a third of savers, they have built a comfortable financial cushion should the worst happen. According to the Money Advice Service, a good rule of thumb is to have three months’ essential outgoings available in a savings account. However, Nationwide’s poll shows 34 per cent have four or more months’ worth of salary squirreled away.

Consumer and personal finance expert Sue Hayward comments: “It’s great to know we’re sticking to our savings habits, despite the low interest rate culture. However, while it’s good news we’re putting money aside, what concerns me is that we’re not very savvy about knowing how much interest we’re earning. Yes, it can be tougher than ever to find inflation beating rates, but there are still ways to earn around five per cent if you shop around, or consider a mix of both current accounts and regular savings accounts. In cash terms, you can boost your savings pot by over £100 a year this way, based on a savings balance of £2,500.”

 

1 in 67 Brits is now a millionaire
1st September 2016

1 in 67 Brits is now a millionaire, reveals new research, up a third from 2010.

690,000 people in the UK are now worth at least seven figures, according to research by Barclays. Although this is a slight dip in comparison to 2015, falling by 3.8 per cent, the longer term trend paints a better picture, with the number of millionaires increasing by 34 per cent in the last six years.

Indeed, every region is more prosperous than last year, with uplifts in either household wealth, GDP, household expenditure and earnings – and a decrease in unemployment, according to the lender’s latest Prosperity Map.

Despite uncertain economic conditions during the year caused by volatile stock markets, China’s slowdown and the lead up to Brexit, the index shows an overall uplift in prosperity across every region of the UK in comparison to last year’s study. The research uses factors including numbers of millionaires, average annual pay, the percentage of households giving to charity, business growth rates and exam scores to generate a unique Prosperity Index Score for each UK region.

Although London continues to be the most prosperous city overall, other UK cities are emerging as prosperity hotspots. In a sign of their status as increasingly attractive areas to live and work, both Bristol and Cambridge saw higher growth in house prices than London, at 14 per cent for Cambridge and 13% for Bristol, compared to just 11 per cent in London.

Cities outside of London and the South East also performed strongly on entrepreneurial activity too, with Manchester, Cardiff and Sheffield all seeing some of the largest increases in SME turnover at 15 per cent, 12 per cent and 11 per cent respectively – a strong indicator of growing prosperity in these areas.

Paul Swinney, Principal Economist, Centre for Cities, says: “While it is encouraging to see some cities comparing favourably to London and the South East on some of the key measures in the Prosperity Index, it is important to remember that there is still some way to go to ensure that everyone in the UK can enjoy equal levels of prosperity.

“A large part of this will be investment in skills, particularly in areas which are still recovering from the decline in traditional industries. The most vibrant places are those which have high-skilled workforces, and which have focused on supporting firms and employment in the knowledge-based service sectors. By making these issues a priority, regions across the UK can start attract more of the industries and jobs which offer the best prospects of long-term growth and prosperity.”

Scotland led the way in terms of increase in household wealth, rising by 13 per cent since 2015, beating both London (up 12 per cent) and the South East (up 11 per cent). This contributed to the region moving up the overall Prosperity Index ranking by three places to 7th overall. This increase in wealth may be down to the large increase in private pension wealth in particular, where the median increased by 60 per cent, compared with 24 per cent for Wales and 19 per cent for England.

Despite being the least prosperous region overall, the North East saw an impressive increase in average annual earnings of 6 per cent, rising to £24,748 – second only to Northern Ireland, where earnings increased by 9 per cent year on year to £23,643. Leeds came out on top for cities when it comes to increase in average earnings, rising by 6 per cent year-on-year, followed by Newcastle, where earnings rose by 5 per cent. This is in stark comparison to London, where average earnings dropped by 1 per cent in the same time period.

Akshaya Bhargava, Chief Executive, Wealth, Entrepreneurs and Business Banking, Barclays, says: “It is particularly reassuring to see that there is strong activity throughout the whole of the UK – be it house price growth in Bristol and Cambridge outpacing that in London; Scotland registering the highest increase in household wealth; or rises in SME turnover coming from Manchester, Sheffield and Cardiff. As we look at the future of global trade and inward investment post-Brexit it is the success of our entrepreneurs that will help drive future prosperity – it is essential that business leaders and policy makers continue to nurture these growth areas in order to ensure that these trends continue.”

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