Interest rates rise: What does it mean for markets and investors?

Laith Khalaf, Hargreaves Lansdown

Laith Khalaf, Senior Analyst at Hargreaves Lansdown shares his opinion on today’s announcement that interest rates have risen to 0.5%.

It’s been over ten years since the last interest rate rise, so investors will have to dig deep in their memory banks to remember what one looks like.

While a rise in interest rates would mark the start of a new era in monetary policy, we don’t anticipate too much disruption in financial markets, as the tightening stretch of the cycle looks like it will be long and shallow.

Interest rate rises are widely expected, so it’s really any shift in the anticipated timetable for tighter policy that will move markets.

This is a two way street, and the path of interest rate rises can shift further into the distance as well as nearer into the foreground. To that end it still make sense to hold a diversified portfolio, in case things don’t go according to the script. Indeed if an interest rate rise doesn’t materialise tomorrow, we could see sterling fall, and gilts rally.

However we still think there’s little value in global bond markets, as the low yields on offer don’t compensate investors for the risks they are assuming.

The prospect of rising interest rates throws this into sharper focus, because tighter policy will put downward pressure on bond prices. Perhaps the most concerning aspect here is the high number of people who are blindly defaulted into bonds within their pension plan, just as they are about to retire.

For equity investors, the picture doesn’t change too much. Rising interest rates turn the screw, but they will only happen if the economy is in good enough shape, which would be positive for company earnings. In the scenario of low productivity we face in the UK today, both economic growth and the pace of rate rises are likely to be sluggish.

There could be some individual stocks which fare better than others, with the banking sector probably best positioned to take advantage of rising rates. The flip side of this particular coin is that cash savers probably shouldn’t get too excited just yet.

An interest rate rise is a hollow victory for cash savers because it still won’t deliver a level of interest that keeps up with price rises. Tighter monetary policy will also take its time to filter through to cash savers because the banks will delay passing through higher rates to depositors for as long as possible.

Overall we don’t see much reason for investors to make significant changes to their portfolio. The main thing to check is how your pension is invested as you approach retirement, and if it is shifted into bonds, make sure that’s an appropriate strategy for you, and that you’re happy with the risks.

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