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Interest rates on the up

 

Posted on 2 August 2018

The Bank of England has today announced a rise in interest rates, from 0.5% to 0.75%, the highest it’s been in almost 10 years but still an incredibly low rate on a historic basis. So, what does this rise signal for the wider economy?

Although a modest increase, rate rises are usually indicative of an economy that is really picking up. So, one must assume that the Bank of England is confident the economy has recovered from its winter slowdown, is confirming the dip was only temporary, and is confident of a strong growth trajectory.

Certainly, in recent months the UK has experienced a real boost in its economy, with some (but certainly not universal) strong retail sales, an increase in some industrial activities, and exceptionally low levels of unemployment. It is thought that a summer of notable events – namely the royal wedding, England’s success in the World Cup and indeed the heatwave - have also helped drive the economy.

But what else may be behind the decision to raise rates?

Interest rates act as a brake on the economy, and can prevent inflation from spiralling out of control. Whilst the increase is good news for savers, who should see a slightly better return on their savings, for borrowers it may increase the cost of any existing debt, and slow new borrowing due to its increased cost. This, in turn, should put the brakes on inflation, which has remained stubbornly above the government’s 2% target for some time now.

Rates also affect the value of Sterling; in this regard there have been pressures on Sterling since the Brexit referendum in 2016, after which its value plunged and has remained subdued since. Whilst this created an ideal buyers’ market for investors in UK businesses from overseas who held stronger currencies, the rise will likely see an increase in the value of Sterling and, perhaps, a slowing in international takeovers of UK businesses. However, rising rates do represent further promise for our economy’s prospects and could boost levels of investor activity generally.

If you would like to speak to one of our Corporate Finance experts regarding the economy, or how the rise in interest rates may affect you, please get in touch today.

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