The week in financial news: interest rate rises and a trillion-dollar company
Interest rates go up
The Bank of England sets the country’s interest rate to control inflation. We’ve seen inflation start ticking up – that’s how much the prices of goods increase over time – and to control that, they’ve decided to take interest rates up to 0.75% (from 0.5%).
What’s interesting is that the nine-man Monetary Policy Committee at the bank which decides whether to change the interest rate was unanimous in its decision yesterday; in recent times there’s always been a split between those who want to raise and those who wish to keep the rate the same.
Looking ahead, this means that if there’s some kind of economic challenge or uncertainty because of Brexit, the Bank now has some leverage because they can drop interest rates to stimulate the economy without simply pumping more money into it (quantitative easing, the policy followed after the financial crash).
So what does this mean for the average man and woman on the street? If you’re not on a fixed rate mortgage – and most are, with a record low of 35% of mortgages not being on fixed rates at the moment – then your monthly payments are going to go up. The average UK mortgage is approximately £120,000 and at that level, your monthly repayments will rise by around £15 or so.
Going back to The Money Plan, step 4 is to pay your debt down and that’s even more important now as interest rates start to rise. We’re not expected to see the double-digit rates of the past, we have more control now, but the rates are likely to rise over time so let’s pay those debts down as soon as we can.
The market response
The markets have been factoring in an expected raise in interest rates for some time now, the decision to raise rates was widely expected, so nobody’s really surprised by the news. The US started increasing their interest rates some time ago now, much more quickly than we have.
Interest rates are still really low and I don’t see rising rates as a trend which will continue rapidly, but I think they will continue to go up in the long-term. And they need to: when interest rates rise then wages tend to rise, the cost of goods also tends to rise – but then the stock market grows too because companies are charging more for their products. It’s all connected like a circle, and healthy interest rates promote economic growth.
What about savers?
The banks and building societies have reduced their savings rates to minimal levels because the BoE rate has been so low, but despite the rise yesterday they’re widely expected to keep savings rates low to boost their margins – you’re unlikely to see a corresponding 0.25% increase in the interest rate of your deposit savings.
What we do have now though is a lot of challenger banks disrupting the market outside the ‘Big 5’ high street banks: there are a lot of newer names coming to the market that will offer you better rates of interest. These banks are trustworthy, but just make sure if you go with one that you’re protected by the FSCS protection levy and that you don’t take any risks you’re not comfortable with.
What’s the likely impact on property prices?
The property market is a chain, which starts with first-time buyers and ripples out from there. At the top end you’ve got the very wealthy international investors who like to park their money in London properties because it’s a safe haven.
Some time ago the Chancellor changed the tax treatment of buy-to-let properties by increasing stamp duty, taking away the mortgage offset, and taking away the capital gains relief on them. These measures made buy-to-let much more unattractive as an investment, which really slowed the growth in property prices. Now we’re seeing interest rate rises, that will have a compounding effect.
Property is what’s called a fixed income investment, an asset that generates an income. Most people borrow to buy that asset. When it costs you more money to buy that asset, you’re going to pay less for it.
That’s why I think we’re going to see a plateau in the market. I don’t think we’re going into a property crash because we have a shortage of properties in the UK, but I do think we’ll see property price increases slow down.
We saw the biggest price appreciation in properties in the mid-90s and that continued even after the financial crisis, which coincided with interest rates falling over the same period.
The Brexit effect
Again, bear in mind that we don’t expect interest rates to rise rapidly – the only thing that would make that happen is continually growing inflation, which is caused by a booming economy. We have so much uncertainty surrounding Brexit and what’s going on that this doesn’t seem likely.
The rate rise overall gives us a little more strength to go through Brexit and once that’s happened we’ll be in a whole new chapter for the economy. We don’t know what will happen then.
Apple becomes the world’s first trillion-dollar company
Not only is Apple present in most of our homes, it’s now the biggest company in the world after reaching the milestone $1tn value – that’s pretty impressive for a business started by a guy in his garage after seeing a presentation by Hewlett Packard.
There’s been a race going on between Google, Amazon and Apple to reach the $1tn mark first, and Apple has won that race after posting strong results this week. But the others won’t be far behind; just like when Roger Bannister ran the four-minute mile, keep watch now to see other companies quickly join Apple in the $1tn club.
Lots of people wrote Apple off when Steve Jobs passed away, saying he was the innovator behind the company’s growth. Now Apple may not be as innovative as it was then, but its reach is enormous, and it’s present in so many of our homes.
What does this milestone tell us about the bigger picture? It tells me that capitalism works. The earliest form of capitalism was the traditional market, where you made and sold goods and reinvested to grow your business, trying to stay ahead of the competition.
The amount you pay for an iPhone X is ridiculous, there’s such a premium on it, and that fuels competition. You have new companies, particularly from the Far East, bringing in cheaper alternatives, which spurs the growth of more up-and-coming companies.
This is why the stock market works over the long-term (seven years or more ideally): because capitalism works.