We didn't start the fire, sang Governor Bailey
3 Feb, 2023
More real pain for millions of variable rate mortgage holders this week as the Bank of England voted by 7 (for) to 2 (against) to increase interest rates to 4%.
This is the highest rates have been for 15 years. And it hurts.
The bad news is obvious – the average mortgage customer not on a fix will see monthly payments go up by about £70. And those with fixes coming to an end will have the soundtrack to Jaws playing in the recesses of their minds.
As a very rough guide, rates are about 5% at the moment for a 2-year fix. If your fix is coming to an end, you can always work with a broker to get a mortgage offer lined up – and typically wait a few months to see what happens. You don’t have to commit in a wham-bam-overnight way.
There’s a lot of anger out there in the gnarled, angry meta jungle of Twitter, and often directed to Andrew Bailey. But he has a furnace to tackle with a relatively crude watering can.
Manage the fire – but don’t put it out!
If inflation is a fire, then it’s raging out of control. Interest rates are the water. You don’t need to be an economist to see this. For consumers, higher rates mean we borrow less and have less for discretionary spend. For businesses, more is spent on servicing debt, and borrowing to fund growth is more challenging. So everything slows down.
The problem is that this remains a finely tuned balancing act. The Bank doesn’t want to entirely extinguish the fire and watch the economy grind to a smouldering halt.
Bailey: “Whoopee, I crushed inflation!”
Everyone else: “Yes, but you also killed the economy.”
We know that things are slowing. The Bank has lowered its inflation forecast from 10.5% today to 4% by the end of the year, and revised the narrative to one of anticipating a ‘shallow’ recession.
The consensus view is that rates might go up to 4.5% by the middle of the year, but then start to come down by the end of the year as things cool.
Savers can feel quite chirpy…
Savings rates should rise. But ‘should’ doesn’t mean ‘will’. The banks are always a bit slow off the mark here, and the chief execs of the big banks are in front of the Treasury Select Committee next week to answer questions on savings rates, amongst other things. Good.
What’s around and available today? National Savings and Investments (NS&I) has revealed it is bringing back its Guaranteed Growth Bond for new customers – paying 4 per cent on its one-year fixed rate deal. Better than a slap in the face with a wet fish!
But if you don’t fancy locking it away, there are some decent variable rates around too – for example, Shawbrook Bank is paying 2.9% in a competitive offer. So do your homework and shop around.
The flipside of these higher rates is of course debt. If you have credit card debt, it’s worth exploring a 0% balance transfer credit card.
… and stock market traders also have some spring in their step
It’s not just the UK’s central bank playing more upbeat (or less gloomy) mood music. The US has also hinted at a potentially softer future approach to interest rate hikes, which stock markets like. And energy prices are coming down. Goody goody, cry the traders.
This week the FTSE 100 is up, the S&P 500 hit a 5-month high and the tech-heavy Nasdaq closed up 3% - reminding us that markets do not march in tandem with the economy. We’ve had a mini bull market this year at the same time as consumer sentiment and economic news have been miserable.
Want to know the outlook for tech stocks?
On a final note, tech stocks have been major drivers of stock market returns in the last decade, especially in the US. But the last year has been more challenging.
This week Apple posted its first revenue fall in over three years, blaming supply chain disruptions in China, and Alphabet and Amazon have also signalled further weakening. At the same time, ChatGPT-fuelled interest in AI is running hot. (I’d be a lot more excited if it could drive and cook for the kids, instead of parroting them out a boring Battle of Waterloo essay!).
This week’s sponsor article from Invesco considers using ETFs to access the technology sector. And you can also register to join myself and special guest Ben Rogoff, manager of Polar Capital’s Technology Trust, for a live webinar on 21st February at 6pm to talk all things tech.
Have a lovely weekend everyone. If any of you have not yet voted in our Consumer Choice Award for your favourite investment platform, and can spare 1 minute to do so, this is your final call!
We are gearing up to bring you our Best Buys 2023 for ISAs and pensions, as well as your Consumer Choice winner, and will be revealing all in 2 weeks’ time. Control your excitement!
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