In the UK, interest rates have been kept at 0.25% by the Monetary Policy Committee. Nonetheless, the fall of the pound and the ongoing inflation means the MPC had to discuss a 0.25% rise, bringing interest rates to 0.5% by the end of this year.
Whilst acknowledging that five votes are needed to pass the decision of raising rates, 3 members from the 8 voted in favour of a change which did not include Bank’s Governor Mark Carney who appeared to be more worried about a the slowing of consumer spending, rising household prices and the UK’s dismal wage growth.
Moreover the more inflation there is, the more likely members of the Committee will vote in favour of an increase as this has currently dented the overall growth of the UK and all of its advanced European neighbours.
In May, inflation rose higher than the target 2% limit established by the Bank of England as it hit 2.9% this was mainly driven in part by the pound’s weakness since the Brexit vote which has in turn made imports to the UK more expensive.
Impact on the Pound
The potential for the Bank of England or BOE rate rise will help the pound get back on his feet but since the decision has yet to be made it will have a negative impact in the short term.
Currently the sterling is not performing or showing its dominance against the USD, Euro and New Zealand Dollar and if interest or exchange rates are not altered and regulated according to the present market then borrowing prices go up along with the interest rate, then the investments decrease which reduces prices making exchanges easier and cheaper resulting in a rise of the pound’s power against foreign currencies. For the time being, the pound is 14% lower than the US dollar when compared to before the Brexit announcement of 2016.
Impact UK stock market (FTSE 100)
Overall, a low powered pound is benefitting the FTSE 100, up by 18% from 2016, nonetheless, several big companies are not profiting from the downfall of the sterling, in fact, multinationals investing and making money overseas lost more than others since each transaction costs.
An increase of interest rates will empower the pound which will benefit the companies listed in the FTSE 100, their buying power will grow and so will their investments.
Impact on your Defined Benefit Pension
Quite simply, if the interest rate goes higher your DB Pension or Final Salary Pension valuation could potential decrease substantially, so now would be a good time to get a current valuation, which I can do free of charge.
See my article on DB Schemes and the huge under-funding that may affect your retirement and contact me directly if you would like more information and know your options.
All the Best
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