BoE warns on pace of future rate hikes

Tom Stevenson, investment director for Personal Investing at Fidelity International, comments:  “No big surprises at today’s Super Thursday announcement, where the Bank of England revealed its hand on interest rates, released the latest MPC meeting minutes and crucially, presented its quarterly inflation report. Seven out of the eight members of the MPC voted to leave rates unchanged at 0.25%. However, the Bank indicated that if the economy continues to recover as it expects then interest rates may need to rise more quickly than the market currently expects.

“All eyes were on the latest inflation report today, widely viewed as the quarterly health check on the state of the economy. As expected the Bank cut its growth forecast in the short term but slightly raised it in the medium term. It also raised inflation guidance and the Bank of England said it expected inflation to hit 2.7% by June 2017 , considerably overshooting the Bank’s 2% target.

“The weak pound since Britain’s vote to leave the EU has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods. For  now, it seems the Bank of England will be sitting tight on a rate rise given the headwinds the UK economy faces and the strengthening of the pound. Mr Carney remains of the view that the Brexit negotiating period will be extremely challenging for the UK economy. But today’s announcement introduces a more hawkish tone than we have seen previously.

“With the BoE likely to keep interest rates parked at historic lows for the foreseeable future and with inflation on the rise, anyone with savings still sitting in cash will struggle to generate a real return.  If anyone is still unsure about the benefits of investing in stocks and shares over saving in cash then our calculations show that if you had invested £15,000 into the FTSE All Share index over the past ten years you would now be left with £25,332. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £15,740*. That’s a difference of £9,592 – too big for any sensible saver to ignore.”