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

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.

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