Predicting Interest Rates Becomes Interesting

Last week saw the release of the UK’s unemployment figures that saw a fall in the rate of unemployment to 7.6%, a rate faster than was expected. 

Whilst this is to be welcomed there will be a concern that Mark Carney, governor of the Bank of England, recently announced that interest rates will now be linked to unemployment figures and that consideration of a rise in interest rates would not be given until the jobless rate has fallen to 7% or below.  

Today's figures could mean that interest rates will rise faster than expected.

This could be great news for savers who currently struggle to achieve 1.5% before tax on their deposit funds, even if they tie their money up for a year.  If interest rates were to rise, long term savers might want to reconsider the decision for longer-term accounts, since they would not be able to take advantage of any future rises in interest rates until after the expiry of the (new) fixed term.

It is worth noting that the current deposit rates are still less than the recently reduced rate of inflation, which means that the future spending power of money will go effectively backwards.

On the other hand, mortgage borrowers are generally charged a rate much higher than the Bank of England base rate. So, those considering fixed-rate mortgages may well be advised to consider fixing now before any increase in rates.

Any pension savers considering buying annuities may be affected by a rise in interest rates, as annuity rates normally rise when interest rates rise. Whether annuities will continue to rise in the same way we have seen this year is subject to some conjecture. Annuity rates are linked to gilt yields and some commentators are suggesting that the Bank of England would consider exerting pressure to control gilt yields, possibly even by restarting their Quantitative Easing programme. 

Annuity rates are still much lower than they have been historically, which is forcing pension savers to consider other methods of arranging their post-retirement income – for example, income drawdown. And with Financial Planning Week starting on 24 November so there’s never been a better time to think about your finances.

Zane Hunter

Chartered Financial Planner

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  contactus@broadstoneltd.co.uk