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Investment Line: Market Update - 3 August 2018

Investment Line: Market Update - 3 August 2018

Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are focusing on, and shares our thoughts on the issues of the day.

UK INTEREST RATE RISE TO 0.75%

The Bank of England raised the bank rate to 0.75% on Thursday, the first time that the overnight rate of interest has been higher than 0.5% since February 2009. Why now? Several members of the Monetary Policy Committee (MPC, the committee that votes on changing the interest rate) has been calling for higher interest rates for some time, and it was interesting to see that the vote to increase was unanimous this month, after voting 6–3 against last month. The MPC was expected to raise rates in May; however, they decided against it after some weak economic data at the start of the year. They are now convinced that the slump was temporary and are monitoring the pick-up in wage growth, which, along with inflation remaining stubbornly above target and a GDP growth rate ‘around its speed limit’, has led them to this moment.

There have already been headlines in the press warning of financial disaster, with homeowners that have a variable interest rate mortgage having to pay up to 50% more in interest following the increase. However, the mortgage market is very different today compared to February 2009. Around 70% of all mortgages in 2009 where linked to the Bank of England bank rate; today around 33% of mortgages are linked to bank rate with 66% of mortgages being on fixed rates, meaning that most homeowners won’t be immediately affected by today’s news. Over 90% of all new mortgages are now on fixed rates, and the average fixed rate mortgage is now cheaper than the average variable mortgage for the first time since 2007. Despite this, over 3 million homes will have to pay more in interest on their mortgage, which means they will have less disposable income. A 0.25% increase shouldn’t lead to ruin for those affected, with mortgage arrears running at very low levels of 1% compared to 3.5% in February 2009.

The concern would be if the 0.25% rate rise is the first of many to come, which could have a material impact on disposable income. We don’t think that this is a concern that you need to worry about. Investors expect the average interest rate over the next five years to be 1.11%, so maybe one more 0.25% increase in the next five years. The Bank of England is being very cautious about the potential of raising interest rates and the impact on UK businesses and the consumer, however the Bank expect interest rates to go up a bit more than what investors think. Indeed, Mark Carney, the Governor of the Bank of England, stated in interviews yesterday that his best ‘guidance’ was to expect one 0.25% rise per year for the next few years. While it does mean that some borrowers will now have to pay more in interest, savers should be rejoicing. Don’t get your hopes up for an instant uplift in your savings interest rate though – banks are notoriously poor at passing on higher interest rates to savers, and savers suffer from inertia in relation to current account banking.

So, overall, we don’t think it’s a material change that you must worry about. It will marginally affect some borrowers; however, the effect is likely to be negligible in the overall impact on the economy. A bigger concern might be whether rates can be raised to a high enough level to be used in an impactful way when the next recession strikes … as ever, we are watching carefully and are ready to make changes to portfolios if appropriate. There is no second side to our document this time, as there is nothing new to say on asset allocation from our last missive.


Investment Line is written and edited by members of the Mattioli Woods Asset Allocation Team, and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can fall as well as rise, and investors may not get back the full amount invested. Past performance is not a guide to the future.

Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.