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60 seconds with Keith Wade on the investment impact of rising interest rates

With interest rates set to rise in the UK and the US Schroders Chief Economist Keith Wade looks at the likely impact the hikes will have on investments.

15/09/2015

Keith Wade

Keith Wade

Chief Economist & Strategist

Schroders

Will rate rises be a saving grace?

The Bank of England is signalling that interest rates will need to rise fairly soon, probably towards the end of the year or into 2016.

That will be a huge change because we have had 6 years of the bank rate at 0.5%, the lowest for more than 300 years. News that interest rates are going up, however, is probably good news for savers.

Savers have been squeezed over the last few years. Interest rates have been so low that they have been below inflation, which means people have seen the value of their savings actually eroded in real terms.

So, if interest rates rise savers can start thinking about building up their cash.

Time to exit the stockmarket?

Often when interest rates rise we see quite a lot of volatility in the stockmarket, which reacts to that change in the cost of money. The question then is should we start to switch out of those investments in the stockmarket?

There are two things to consider:

  1. The reason interest rates are going up in the UK is because the economy is getting back to normal, we are recovering from the financial crisis. So it’s a sign of health in the economy, which is a good thing for growth and a good thing for companies quoted on the stockmarket.
  2. Although interest rates are going to go up, they are not going to go very high. We don’t think interest rates will go much above 2%. There’s still a lot of debt around in the economy. Lenders are reluctant to lend, borrowers are reluctant to borrow.

That means that the level of interest rates that we need to get to in order to restore equilibrium is probably not that high, maybe only 2%. So, it will be some relief for savers, but not an awful lot.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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