Interest rates rise from 0.25% to 0.50% for the first time in a decade!

Last Thursday, the Bank of England’s Monetary Policy Committee (MPC) voted seven-two to raise interest rates from 0.25% to 0.50% for the first time in over a decade to combat Brexit-fueled inflation.

While the rate hike was widely anticipated, the market reaction to the news has been somewhat surprising. The Pound has fallen by 0.70% against the Dollar since the announcement. Similarly, the cost of a five & ten-year fixed rate loan/swap has dropped by 10 bps and 11 bps respectively.

So, what happened? The devil, as they say, is in the details. The modest rise in rates was considered less significant than the minutes of the MPC meeting, which highlighted the fragile state of the economy ahead of the 2019 departure from the EU. The MPC warned that the Brexit vote is now having a ‘noticeable’ impact on the UK economy, weighing on business investment.

Crucially, policymakers omitted language from previous statements stating that more hikes could be needed than currently anticipated by financial markets. Moreover, Mark Carney emphasised that following last week’s hike, the MPC continued to expect that “future increases in interest rates would be at a gradual pace and to a limited extent”. The next rate rise is now expected to occur no sooner than September 2018!

The decision to raise rates translates into higher costs for those on variable rate mortgages and other borrowers. Almost four million households will now have to pay around £200 more per year for every £10,000 of mortgage debt as a result of the rise. However, the hike could be welcomed by some investors, namely, the UK’s 45 million savers.

What does this all mean for businesses/investors looking for new finance? The cost of securing a £5m loan over a ten-year period has dropped by £52,000 in less than a week! In other words, swap rates do have a real impact on all of us.

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