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Interest rate rises prove hard to predict

The Bank of England did not raise interest rates in May, despite earlier suggestions that it would.

About four years ago a member of the Treasury Select Committee compared Mark Carney, the Governor of the Bank of England,
to “an unreliable boyfriend”. The remark was prompted by Mr Carney’s record of talking about future interest rate increases that
never became reality. The nickname came back to haunt the Governor last month.

The Bank had been hinting strongly that rates would rise in May,
and by early April the money markets were effectively putting
the odds on a May increase at 90%. However, a combination of
surprisingly bad economic numbers – growth fell to just 0.1% in
the first quarter – and downbeat business surveys prompted a
rethink. By the time the Bank announced the rate would be
held at 0.5% on 10th May, nobody was surprised.

The next opportunity for changes to the interest rate will
come on 2nd August 2018. when the Bank publishes its next
Quarterly Inflation Report. The medium-term expectation is
still that interest rates will rise, unless something disastrous
happens to the UK economy. For its part, in May the Bank
repeated its familiar mantra that, “any future increases in
Bank Rate are likely to be at a gradual pace and to a limited
extent”.

If you have investments in fixed interest funds, now could
be a good time to review those holdings. As the graph
above shows, the yield on 10-year government bonds is
already around double the low hit in the wake of the Brexit
vote. It could rise further – depressing bond prices – if the
Governor becomes more reliable in his rate rise forecasts.

 

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.