The Bank of England is indicating the interest rate will increase in the coming months, so it may be a good time to review your investments.
The Bank of England held the interest rate at 0.5% in May, but its Governor, Mark Carney, reiterated that rates will probably need to increase if the inflation goal is to be met. Interest rates are already increasing in the US, with further rises expected in 2018.
The economists’ term for what is happening is ‘normalisation’. For the rest of us, it is a steady increase in interest rates.
The Federal Reserve, the US central bank, has been raising rates since December 2015. Despite threats to do the same, the Bank of England cut rates in August 2016, after the Brexit vote, but then reversed that change last November.
Impacts
Increases in short-term interest rates could have a variety of consequences:
- The values of fixed interest securities, such as government bonds (gilts), could fall. Much will depend upon how long-term interest rates react – these do not necessarily follow the short-term path.
- Share values could fluctuate further. Rising interest rates usually benefit banks, while companies that borrow heavily can suffer.
- The value of commercial property could come under pressure, although rental yields are currently above those available from gilts.
It may make sense to review your investments now in preparation for rising interest rates.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
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