BLOG: Do you need to worry about an interest rate rise?

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28/07/2014
Higher interest rates now appear to be a genuine and looming possibility. Bank of England Governor Mark Carney, said this week that keeping interest rates at their current level risked a dangerous housing bubble, which may ultimately prompt a return to recession. It is that time of year when most people are more interested in sangria than savings rates, but should people be concerned?

In theory, it should be simple: Those people who have net debt will be worse off, while those who have plenty of savings will be better off. In practice, it is unlikely to be that straightforward. Carney has said that interest rate rises will be ‘gradual and limited’, so in practice, mortgage rates are unlikely to rise significantly in the short term, and savers are unlikely to see attractive interest rates for some time. Nevertheless, the usual rules apply – people should ensure that they secure the most attractive mortgage and savings rates possible.

The most profound impact is likely to be felt in the bond markets. Until relatively recently, investors in bonds have watched happily as their investments have risen in value, and paid them a relatively high income for more than a decade. There has been more turbulence recently, but investors have yet to see any significant deterioration in the value of their bond holdings.

This is a real possibility if interest rates rise. The good news is that the income available from bonds would rise, which would make them attractive once again as new investments for income seekers, but it is not so good for those who already hold bonds. The most vulnerable areas are likely to be UK government bonds and the highest quality corporate bonds. Many multi-managers have already recognised this potential problem and have been steering clear of these parts of the market for some time.

The impact in the stock market will vary from company to company. If interest rates rise, it may theoretically make the income available from dividends less attractive because investors can achieve a higher level of income in safer assets, such as bonds or cash. This may dent some low-growth, high dividend companies. However, as inflation becomes a greater concern, companies that can grow their revenues and dividends ahead of inflation should be highly prized.

The potential for interest rate rises should not cause you to drop your holiday cocktail, rush back, remortgage and rearrange your investment and savings portfolo: Despite some more apocalyptic predictions, any speedy hike in interest rates is unlikely. However, it will create a different landscape and everyone is likely to be exposed to some extent. It calls for no drastic action, but people should make sure that they are on the right side of the change.

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