How investors can prepare for interest rate rises
Having been at a record low of 0.5% since March 2009, any increase is sure to have an impact on consumers’ finances.
Chris Williams, chief executive of consumer advisory service, Wealth Horizon, said: “Carney has for a long time outlined plans to keep rates low for a sustained period, but his announcement this week has been more ‘hawkish’.
“For investors, now is the time to prepare for a changing landscape in which many of the strategies that have been adopted in the low interest rate environment need to be reviewed and reconsidered.”
Here, Williams offers some advice on how best to prepare for the forthcoming hikes.
• Review all aspects of your day-to-day finances. Take a ‘bottom-up’ approach to your budget. What will interest rate rises mean for your daily finances and what impact will this have on your ability to invest? Find out what you can realistically afford to put aside each month and make cut-backs where necessary in order to keep building your nest egg.
• Has your appetite to risk changed? When interest rates rise, it can be a signal of an improving economy. However, fixed interest investments tend to suffer, and with cash effectively becoming more expensive, it can motivate equity investors to review their holdings, potentially taking profit off the table and selling stocks, especially with markets at historically high levels. Now could be a good time to review your investment strategy and asset allocation to ensure your portfolio is well diversified.
• To fix or not to fix? If rates rise, a fixed rate mortgage will almost certainly be the preferred route for many homeowners. However, with investments, fixed is not always the way forward. Fixed interest investments can actually suffer with rising rates. You may want to take a closer look at these and consider whether to review your holdings in them.
• Consider currencies. Fluctuations in currency are closely linked to interest rate rises. This could be good news for sterling, which may gain momentum against other currencies because higher rates attract foreign investment. Even in the brief moment following Mark Carney’s announcement, sterling rose close to five-year high. If you have been investing in the currency market, look out for the rising price of the pound.