Central bankers tend to play their cards close to their chest. So when Bank of England Governor Andrew Bailey says she “will have to act” to fight rising prices, it is openly showing her hand to anyone who cares to watch.
And look, they did. Responding quickly to Bailey’s comments last Sunday, financial traders advanced their expectations for the first interest rate hike since 2007 at next month’s meeting of the BoE’s policy committee.
But this is only the beginning. Another hike is widely expected in December, with more in the first few months of 2022. The base increase could drop from 0.1% now to 1.25% or more by the end of next year – the highest level since the 2008 global financial crisis.
Moreover, far from being in the lead, central banks are far behind the market. Driven by rising energy prices, bond yields rose as the 10-year gilt yield fell from 0.5% to 1.1% in just two months.
So, is it time to heed the governor and reshuffle our personal financial cards? Adjust our mortgages to lock in low interest rates and revise savings portfolios?
In truth, it’s still pretty hard to pinpoint where we might be in a few months, with pundits divided on whether inflation is peaking temporarily or starting a sustained surge.
The same traders who raised their short-term rate expectations are still betting that rates will be fairly stable three years from now – as the 2021-22 rate hikes kick in, the inflationary heat eases and growth economy is slowing down.
I think there is more than a touch of wishful thinking involved in this benign prospect. This is, after all, pretty much what any sane investor want to, given where we are today. A modest touch on the monetary brake, a slowdown in the economic engine and a gentle maneuver to get out of inflationary troubles.
So it’s probably best to be careful. At the very least, whatever happens to the UK and the global economy over the next year or so, there is a clear sense that the ultra-low interest rates we saw during the pandemic are about to disappear.
For borrowers, including mortgage holders, this is obviously bad news. For savers with cash deposits, which means most of us, this can provide some relief after long years of negative real returns.
So what to do?
First of all, we should look at our debts, especially mortgages. The best deals from street lenders have barely increased since the summer. For example, Halifax, Nationwide and Santander Bank were offering five-year fixed rate loans this week at 0.99% for up to 60% of the value of the property.
But Nigel Bedford, associate director of largemortgages.com, a leading specialist in loans, warns that this cannot go on for long. For parole mortgages, which are sort of a market weathervane because they often involve very long-term loans, lenders have already raised rates – to around 2.8%, down from around 2.4% there. a few weeks.
Bedford says: “Mortgage rates are very likely to be at or near their lowest. So anyone considering a new mortgage should really take action ASAP. “
There is no need to panic. The rates on these equity release loans were much higher before Covid, at 3.5% and above. But those whose fixed-term loans are coming due should start applying for their next deal. Remember, you don’t have to wait until your current arrangements expire to start preparations.
First-time buyers and those considering a big leap in the housing ladder are in a more awkward position, as a more general hike in mortgage rates could chill the housing market and possibly lead to price drops and collapse. buying opportunities. This is a difficult call, which will depend as much on personal and local circumstances as the overall market.
The flip side of higher borrowing costs should be better deposit rates. Finally, good news for savers? Well, maybe. Small banks, struggling for more market share, have already raised rates, with 1.3 percent proposed this week for one-year deposits with BLME.
But the big banks haven’t moved much. Neither has National Savings which offers a paltry 0.01 percent on its income bonds. “So many savers have waited so long for a period of rate hikes that they may have forgotten how slow banks can be to pass them on,” said Sarah Coles of investment platform Hargreaves Lansdown.
So it might be better to look at these start-up banks again. After all, they are covered by the same deposit guarantees as Barclays. Or, if you like risk, invest in crypto modestly, even though bitcoin was trading near historic highs this week.
As for investment portfolios, savers with the traditional balance between bonds and equities have seen their valuations suffer because the prices of gilts have fallen since the summer in connection with the rise in rates. Most stocks have moved sideways since early August, in both the UK and the US, the largest overseas market for UK portfolio investors.
In the face of increasing inflation risks, the standard advice is to reduce exposure to bonds – with the exception of inflation-indexed instruments – and to transfer the equity holdings of heavily indebted companies (which would suffer from high borrowing costs) to cash-generating businesses providing basic economic services that never go out of fashion, such as supermarkets. This is one of the reasons the race to buy Morrisons has been so intense.
By the same argument, investors are often encouraged to pull out of growth-oriented tech companies because the high future earnings they are priced on are worth less if interest rates rise.
But I wonder if this time it will be a little different. The technological revolution is so enormous that it is disrupting entire sectors. The Nasdaq index, the industry’s most representative indicator panel, has retained in recent months gains made earlier in 2021 – and this week is up 19% year-on-year.
Ask yourself how much Netflix would really suffer in a scenario of a likely inflation-induced economic blow? How much would the transformation of the electric car that powered Tesla be delayed? Of course, if the global economy – or the British – were on the verge of serious shock, all bets would be lost. But that’s not what the money markets seem to be signaling now.