One man’s meat

David Crozier

You could have hardly have missed yesterday’s announcement that the Bank of England has raised interest rates. The way it was reported by the BBC, including a special live feed, usually reserved for terrorist attacks and the like, was sensationalist in the extreme.

Yet this move was more symbolic than substantive. The rate went up by 0.25% (that’s one quarter of one percentage point) to 0.5%, still only half of a percentage point.

Let’s try to put that in some sort of perspective.

The last time rates were increased was in July 2007, to 5.75%. The monthly interest on a £100,000 mortgage at that point was £479.17. It is now, after yesterday’s interest rate rise, still only £41.67, less than a tenth of what it was ten years ago.

Interesting fact: 42% of all mortgage borrowers have never experienced a rate rise.*

The other piece of calming news from Mr Carney is that he expects rates to go up in line with market forecasts, implying two further quarter point rises over the next three years.

While any increase in rates is unwelcome news for those borrowing at the limit of their means, and recognising that forecasts can be wrong (especially about the future†), this rise will hardly be sending even the most overextended of borrowers scurrying for the Pot Noodle aisle in Lidl.

Spare a thought for the country’s savers (of which you are probably one). They haven’t seen a rise in the interest they have been receiving from their cash deposits for over ten years. And we do like to hold money in cash. As of September 2017, Britons held just under £1.4 trillion (12 zeroes) in cash deposits and National Savings‡.

That, mind you, was an avoidable problem. Had you put away 1,000 hard earned pounds ten years ago and been able to achieve Bank of England Base Rate interest, you would now be sitting on a deposit of £1,101.97±.

Compare this with investing the same £1,000 in real assets. Had it been bunged straight into a FTSE-All Share tracker, it would now be worth £1,771.90±.

Of course, one must take account of every individual’s personal risk profile, and one must always keep sufficient cash against emergencies and to fund short-term cashflows, (that’s what you pay a financial planner for) but with a more than seven-fold improvement in return over the last ten years, I think there just might be scope for a fair chunk of that £1.4 trillion to be properly invested rather than languishing in cash.

As always, there are reasons to be cheerful.

*Source: Which
†Niels Bohr
‡Source: Building Society Association
±All figures source: Financial Express. Ignores costs and taxes.

The value of investments can go down as well as up. Past performance is not a guide to the future.