As per reporting by the ONS (The Office for National Statistics) for the second quarter in a row, the GDP (Gross Domestic Product) of the UK has declined, meaning that for Q3 & Q4, GDP in the UK shrank by 0.5%.

This was the mildest start to a recession since the 1970s, with the last five in the UK seeing the economy shrink by more than 1%, and in further promising news, forecasters believe this will only be a short-term recession.

What caused the recession?

The BoE (Bank of England) has set interest rates at 5.25% (the highest rate in 16 years) to combat inflation, which has indeed shrunk from the 11.1% high in October 2022 to 4% as of February 2024. And whilst this is promising news, it does mean that the cost of borrowing is high. Furthermore, the inflation rate is still double the BoE's targeted 2%, so interest rates are unlikely to fall until the summer of 2024 at the very earliest.

Why raise the rates?

Increasing the rates forces people to stop spending as freely as the interest on borrowing for products such as mortgages, credit cards, and personal loans is higher.

By raising the rates, disposable income is lower, and it encourages people to save instead of spend which impacts services such as retail and despite Christmas, December retail sales fell by 3.2%. ONS figures show that all major sectors - services (by 0.2%), production (1%) and construction (1.3%) contracted in the final three months of 2023. 

What does this mean?

The promising news is that it's thought to be a short-term recession and despite this recession at the back end of 2023, the economy did grow by 0.1% in 2023, while not inspiring, does mean that there is a platform for growth in 2024. 

Interest rates will likely come down this year, which should help ease the burden of the ongoing cost of living crisis. And lead to a stronger end of year for the UK. As these interest rates come down, and if inflation remains low, this should have a corresponding impact on growth for the UK as it will free up capital for investment.

Politically it could have a large impact on current Prime Minister Rishi Sunak, who pledged last year to halve inflation and grow the economy. Whilst the inflation rates coming down will be a sign of promise, the recession will come as a large blow to Mr Sunak & the Conservatives with an election looming.

1. Good Research Skills

If you have never heard anything about cryptocurrencies before, then good research skills will prove invaluable. Even if you know a little bit, there are still all the little complexities that are highly important to know, including such areas as ledger vs trezor and working out which one is best to utilise. Ultimately, there is no such thing as too much research, and you are betting off going in with your eyes fully open. 

2. Patience

Some people get into the world of cryptocurrencies thinking that they are simply going to be able to make a quick buck and get out again. However, you need to be able to invest at the right time and in the right product. At the same time, you cannot expect that every single one of your investments is going to pay dividends straight away. An impatient investor is likely to end up chasing their losses. 

3. Pragmatism

When you are first starting out in this world, it is highly unlikely that you are going to want to get rid of your day job to start pursuing the world of cryptocurrencies straight away. With this in mind, it is certainly important that you are able to be pragmatic about the state that your finances are currently in. Not only this, but you also need to feel fully comfortable in balancing what you are doing around the rest of the areas of your life rather than letting it fully consume and take over what you are doing. 

4. Passion And Interest

The main way that you will be able to stay ahead of the curve and compete with the very best in the business is to sustain a level of passion and interest in what you are doing. Otherwise, it is more than likely that what you are doing will gradually fizzle over time rather than becoming the roaring fire that you would like it to be.

All of these different qualities can certainly benefit a cryptocurrency trader, so if you feel like there are some areas currently lacking, now is the time to rethink to see if there is something that you can do about it. Ultimately, the more time and effort you put in, the better you are likely to do. Cryptocurrency is not an easy thing to be successful in, and because of that, you need to work hard to ensure you’re equipped with what you need to do well.

Katya Batchelor, banking and finance lawyer at Thomson Snell & Passmore, explains the consequences of the LIBOR transition and how firms can ensure they are prepared for it.

Despite the disruption caused by the COVID-19 pandemic, the regulators of the financial sector continue to focus on phasing out LIBOR and the deadline of the end of 2021 has not changed. After this date firms cannot rely on LIBOR being published, and whilst it may seem far away, the far-reaching scope and scale of the transition cannot be underestimated. To support the Risk-Free Rate (RFR) transition in sterling markets, the Bank of England began publishing the Sterling Overnight Index Average (SONIA) Compounded Index, a Risk-Free Rate that had been chosen to replace LIBOR in the sterling market, from 3 August 2020.

LIBOR is all-pervasive in many businesses. The LIBOR benchmark is used in a variety of commercial scenarios, including as a discount factor or reference rate in commercial contracts. LIBOR is also widely used as the reference rate for intra-group lending arrangements.

How do LIBOR and SONIA differ?

There are a number of significant differences between SONIA and LIBOR and the differences will impact the way firms manage their risk. LIBOR is a forward-looking term rate, which means that the rate of interest is fixed at the beginning of each interest period and is quoted for a range of different maturities. This method provides borrowers with advance visibility as to their financing costs. SONIA measures the average rates paid on overnight unsecured wholesale funds, denominated in sterling. It is, therefore, a backward-looking overnight rate, based on real transactions, with the interest rate being determined and published after the period. Compounding is done in arrears, which means that the borrower only knows at the end of the interest period how much interest it has to pay.

There are a number of significant differences between SONIA and LIBOR and the differences will impact the way firms manage their risk.

Borrowers are likely to face operational challenges if they lack certainty as to what payments need to be lined up in advance of the interest payment date. Market participants are actively looking for a satisfactory solution to this challenge as there may now need to be a distinction between an interest period and a payment date, or period to allow time to arrange payment. In order to provide some forward visibility, the parties may choose to start the reference period for the interest rate calculations several business days before the beginning of, and end several business days before the end of, the relevant payment period. Alternatively, parties may fix the rate a few days before the end of the interest period. In addition, borrowers may need to hold additional cash to cover any potential interest rate movements during an interest period, impacting the internal cash management processes.

Key challenges for lenders and borrowers

Both lenders and borrowers are facing deadlines and challenges, the most important of which is the establishment of market conventions for calculating SONIA compounded in arrears. We have seen some development of tentative standardised documentation – a welcome step. Current recommendations from the Working Group on Sterling Risk-Free Reference Rates state that clear contractual arrangements should be included in all new and refinanced LIBOR-referencing loans to facilitate conversion, through agreed conversion mechanisms or an agreed process for renegotiation to SONIA, or other alternatives. Of course, both lenders and borrowers seek certainty in their arrangements, and the greatest certainty can be achieved by setting out in advance the terms of conversion at a future date.

As always it is essential to keep the lines of communication open between the counterparties, especially when any legacy contracts (existing contracts that do not mature until after the end of 2021) are dealt with.

The importance of due diligence

The process of transitioning for firms is likely to start with a large-scale due diligence exercise. All existing and new documents that include LIBOR provisions need to be reviewed in order to determine what fall-back language is used if a benchmark rate ceases to become available. The changeover from LIBOR to SONIA or to any other alternative rate is likely to impact a number of provisions in facility documents (and documents that are “grouped” with them, like ISDA master agreements or any intra-group funding arrangements), not just the interest calculation. Those include interest payment provisions, payment and repayment dates, break costs and others.

All existing and new documents that include LIBOR provisions need to be reviewed in order to determine what fall-back language is used if a benchmark rate ceases to become available.

A SONIA loan (or any other RFR based loan) does not need any particular interest period selection. Selection of interest periods drives frequency of interest payments to be made and the duration of the compounding period: the longer the period, the more compounding there is.

The parties might want to revisit the prepayment and break costs clauses. Where the loan is not priced against a term benchmark, the arguments for break funding costs are more difficult to articulate. However, a bank receiving an unanticipated prepayment may still look to recover an amount reflecting its shortfall on redeployment of funds.

Looking to the future

There is a real possibility that financial markets will evolve significantly over the next few years and so firms may want to transition to another alternate benchmark as the new financial products and markets become established. Therefore “replacement of screen rate” clauses in new and revised documentation should follow the market standard but allow for any flexibility required by the parties). Also, consider the triggers for applying the new rate. For example, should a new rate apply only if LIBOR is discontinued or should it also apply if some form of LIBOR continues to be published but on a different basis?

Complex financings involve multitudes of different parties and interests so it is important to be aware well in advance what involvement and consents are required; intercreditor agreements often contain restrictions so that the consent of another group of creditors is required to any amendments relating to the interest calculation and payment provisions.

It is essential to be mindful that the transition may result in accounting and tax issues. These may arise because of the uncertainty in the period leading up to the replacement and from the replacement rates themselves. When amending existing facility documentation, lenders particularly must be mindful of their regulatory obligations.

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In addition to legacy loans the working group identified a narrow pool of “tough legacy” contracts that cannot transition from LIBOR. The working group defines tough legacy contracts as those which do not have robust fallbacks for replacement of screen rates and are unable to be amended ahead of LIBOR discontinuation. It strongly suggests a legislative route for dealing with such contracts.

The regulator has also identified that certain type of borrowers will ultimately require a forward-looking rate. However, the current understanding between market participants is that such forward-looking term rates may not be available until relatively late in transition process, if at all.

As the end of 2021 is looming, firms must start to prepare to transition away from LIBOR as soon as possible. We recommend conducting a thorough due diligence exercise on all relevant documents to identify the scope of the project and then holding discussions and making a plan for transition with all relevant counterparties. Internally, organisations need to identify systems and processes that need changing and understand how the change will impact them economically and from an accounting and tax perspective. Implementation may be complicated and have far-reaching consequences and it would be sensible to start the process of transition with plenty of time left.

When searching for your dream home, you will often require a large amount of money to ensure a quick purchase.

If, for example, you intend to move to a new house and have found the home you want at a bargain price, but your current home is not selling as fast as you would have liked and you don't have the deposit for the new purchase until the existing home sells. This can put you in a sticky situation, and you are likely to lose the house to another buyer unless you can find the money quickly.

So, what can you do? If friends and family are not an option, the answer is to get a loan. You can try to go to the bank for the loan, but the process may take weeks due to the red tape. Another solution is getting a bridging loan.

Hanan Shapira, director of Property Finance Partners says "bridging loans in the last few years have begun to be more popular for homeowners looking to purchase a new residential property."

What are they and how do they work?

Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months. One of their advantages is the speed at which an application is processed. One can go from applying for a loan to money in the bank in as little as a week.

To get a bridging loan, you will have to have a property to be put up as security against the loan. You can borrow up to 80% loan to value (LTV) on the equity within your property.

Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months.

There are many uses of bridging finance such as developments, buying a property at an auction, buying uninhabitable properties or properties that require refurbishment for businesses and for buying residential homes.

How does it work for buying a home?

When you obtain the loan, you can use the money to put down a deposit for the new home, and then once your existing home is sold, you can then repay the loan. This is known as "bridging the gap." It is a common use of bridging loans and works well in the right scenarios.

Regulated vs unregulated bridging loans

If the security offered is your current residence, the loan is automatically a "regulated" bridging loan. That means the loan is regulated by the FCA (Financial Conduct Authority). Regulated loans carry an extra level of protection; consumers are protected under the MCOB(Mortgage Code of Business) rules.

If the bridging loan is obtained against commercial property, it is likely to be unregulated.

Where can I get a bridging loan?

Your first thought may be from the bank, but the majority of high street lenders don't offer bridging loans. The banks discontinued offering bridging loans after the crash in 2007-08, due to stricter regulations on unregulated home loans.

There are specialist lenders who provide bridging loans in the market, made up of hard money lenders and private funds. You will need to approach one of these lenders and package an application to them.

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Costs of bridging loans.

Something to take into consideration is the costs involved in bridging finance. Relevant fees are broken down below:

• Interest Rates - Bridging loans carry an interest rate from 0.30% - 1.5% per month.
• Valuation Fees - You are likely to pay a valuation fee of about £700 on a £500,000 property.
• Arrangement Fee - The arrangement fee can be 1% - 2% of the loan amount.
• Legal Costs - You will levy the bill for your legal fees as well as the lenders
• Administration Costs - In some cases, you may have to pay an admin fee; it depends on the lender.
• Exit Fees - There may also be an exit fee involved, again this depends on who you are getting the loan from.

The bridging loan market is quite a competitive currently in the UK, which has lowered interest fees considerably. It is advisable to find a few lenders and to check what they have to offer.

One way of saving you time and money is to use a broker. A broker can package your application in the right way as well as find you the best deal in the market, as they will have access to many lenders.

Towards the end of July the price of gold steadied after US President Donald Trump who criticized the Federal Reserve's interest rate tightening policy. In more recent events, Trump doubled tariffs on Turkey’s steel and aluminium.

In the US gold prices have hit a 17-month low, falling down to the $1,200 mark and are increasingly trading lower. In other countries the price of gold continues to rise.

Daniel Marburger, Managing Director at Coininvest told Finance Monthly: “Gold prices soar in times of uncertainty, which is why many people expected gold price to fall once Trump was elected.

“Throughout his presidency, Trump has proved to be a controversial character and we’ve seen movement in gold price reflect this.

“He has had a positive impact on the value of the US dollar which usually lowers the gold price, however, current trade wars Trump has started with the EU, Canada and China are offsetting this, slowing the decline.  

“High interest rates make gold a less attractive investment, unlike other investments it doesn’t offer interest. It will be interesting to see how the US president’s decisions will impact the value of gold throughout the rest of his presidency – especially as we approach the mid-term elections in November.”

Last November, the Bank of England raised interest rates by 0.25% - the first increase for ten years. The Governor of the Bank of England, Mark Carney, warned that we could see two more increases over the next three years – but then in February of this year, the Bank’s policy committee warned that rates may actually need to rise “earlier” and by a “somewhat greater extent” than previously envisaged. Below Steve Noble, COO at Ultimate Finance, provides excellent insight into protecting against rate changes from hereon.

This will concern many SME owners. Research has shown that a quarter of SME entrepreneurs have funded the growth of their business through their own personal finances. The higher payments required when rates rise across mortgages, credit cards and other loans could put a squeeze on them at a time when conditions are already challenging. This is particularly true if high street banks tighten their lending to specific sectors, as happened during the last recession.

If this happens, good businesses could find themselves pressurised on both sides – putting jobs and entire organisations at risk.

My advice to small business owners and entrepreneurs worried about the prospect of almost certain rate rises is to assess the situation in a series of steps:

Work out what impact a rise of 0.25% or 0.5% would have on your repayment costs

Get your calculator out! Pool together all the finance products you have on variable rates and see how much a rate rise could add to your repayments. Many finance websites have handy calculators that will do this for you. The impact of a 0.25% increase may be small on one individual product, but if you have several it could add up.

Is this something that you can absorb, or will it put a strain on already stretched cash flow?

Think about what the likely increases mean for your business. If you are funding the company through your own finances, will rate rises create difficulties? If finances will be too tight following rate rises and banks reign in on lending, there’s no option but to look at the alternatives and rather than expecting the high street to come up with the answers.

Review your business costs and income

Are there are any unnecessary expenses you can cut out? Little business ‘luxuries’ you’ve been allowing that might need to go? On the income side, have you been undercharging for certain services or are you running ‘special offers’ that might need to end?

Fight back against late payments

Research by the FSB shows that late payment costs the UK economy £2.5bn every year and results in more than 50,000 business deaths. If rates rise as expected, black holes in your cash flow caused by late payments will have increasingly dire consequences. Have serious conversations with your partners and suppliers to lessen the problem, rather than accepting it as a usual part of running a business.

Explore the finance options

There are many forms of finance outside of traditional bank loans. For example, invoice finance that enables you to borrow funds against the value of invoices you have issued but not yet been paid for. Purchase finance that pays your suppliers for goods you buy from them. Asset finance for the purchase of business equipment. Or simply short-term loans to help you meet your needs.

Although banks will offer services of this type, the customer experience will be vastly different. Where high street banks will reject a business that doesn’t meet its pre-set criteria, other providers will offer a more flexible, tailored approach. A solution can be produced with payments terms that suit the business in question, rather than a set agreement which simply won’t work for many in need of financial support. As rate rises seem to be looming, now is the time to begin doing your homework.

SMEs are the growth engine of the UK economy and now more than ever its vital they are supported at every turn. Although rising interest rates will prove difficult for many, for those who plan for the future now, the road will become much less rocky.

Analysts currently expect the Bank of England to hike interest rates in May, but some are opposed, claiming the market is misjudging the BoE’s plans. Bond market guru Mohamed El-Erian says the potential rate hike is "far from a done deal."

Last week the BoE left interest rates on hold, adding to suspicious they may raise them in May. After all, the BoE has been hinting at increased rates since last November’s hike.

This week Finance Monthly asked experts: What are the indications? What's the BoE's plan? What are your thoughts on future implications?

John Goldie, FX Dealer & Analyst, Argentex:

Carney and Co. were not expected to spring any surprises last week, opting to keep interest rates on hold again, much as the consensus had suggested. While the vote to retain the current status of the asset purchase facility was unanimous, there were dissenting votes from serial hawks, McCafferty and Saunders, who saw that the time was right for the Bank to raise interest rates to 0.75%. Many of the major banks have brought forward their forecast for a hike to May, though Bloomberg's interest rate probability tool sets this likelihood still at only around 65%. Commentators are certainly warming to the idea, but most believe that it will be almost another year before a subsequent hike is carried out.

This may be underestimating the path of inflation, wage prices and - importantly – overstating Brexit concerns. Carney has repeatedly suggested that Brexit remains one of the greatest challenges to their forecast models, however, the price action in Sterling already belies a growing optimism, or acceptance, that the economic impact of the 2016 referendum is far less negative than suggested by the major players prior to the event. With a transition agreement in place, a move into the critical trade negotiations is a huge step forward even if it brings us to a position with the greatest potential for deadlock.

With headline inflation remaining high and now wage prices heading in the same direction, the UK's second hike in just over a decade will indeed come next time around. Furthermore, with a May hike enacted, the door will then open for a second hike of the year in Q4, an eventuality that the market is yet to price in. With Brexit concerns reducing on the growing optimism that a transition agreement will provide the time and space for a trade arrangement to be thrashed out, the prospect remains for Sterling to trend higher in the weeks and months to come.

We have been bullish on GBPUSD for more than a year now and even with such a consistent trend higher in the last 12 months, the pound remains historical cheap by nearly any measure. There will be times when negotiations with the EU falter, and with it Sterling will stutter, but with a focus on the policy outlook from the central banks and a long-term chart to hand, the medium-term future continues to look bright for the pound.

Samuel Leach, FX trader and Founder, Samuel & Co. Trading:

When the BoE begins to hike interest rates the main concern I see is the impact this will have on over indebted consumers. I have been paying close attention to UK unsecured consumer debt, which is currently at all-time highs of more than £200bn. Furthermore, the annual growth rate in UK consumer credit is 10% a year which is considerably higher than household income growth (2%), therefore a very concerning place to be. These are unsustainable levels now and an interest rate hike could tip these consumers over the edge. Particularly, those on interest rate tracker mortgages. This will then have a ripple effect on businesses as consumers rein in spending to pay off their debts.

For entrepreneurs it is damaging because funding is an issue as it is, let alone with higher interest rates as it will put off potential investors. The first thing businesses cut back on is risky investments and purchases, so entrepreneurs and small businesses will see the biggest brunt of it in my opinion. For the financial markets we should see strength come into GBP. That, combined with the soft Brexit announcement we had earlier last week could push GBP back towards 1.5 – 1.6 against the USD.

Markus Kuger, Senior Economist, Dun & Bradstreet:

The Bank of England vote to hold interest rates is not surprising, as recent figures indicate a moderation in inflationary pressures. However, with wage growth finally picking up, our analysis suggests that interest rates are likely to increase later in 2018, despite the tepid real GDP growth figures.

Based on our current data and analysis, we are maintaining a ‘deteriorating’ risk outlook for the UK but this could change to ‘stable’ depending on the outcomes of the EU summit this week. If the 28 EU leaders agree on the much-needed transition period until December 2020, the risk of a hard Brexit in March 2019 will drop significantly. That said, implementation risks remain high and the long-term future of EU-UK trade relations are still unclear. Against this backdrop, a careful and measured approach to managing relationships with suppliers, customers, prospects and partners is key to navigating through these uncertain times.

Jonathan Watson, Market Analyst, Foreign Currency Direct:

The Pound spiked up following the latest UK interest rate decision which saw GBPEUR and GBPUSD touch fresh levels as the recent improved expectations were realised. Whilst Inflation had fallen slightly lower than expected it remains above target and rising wage growth too has given the Bank of England a freer hand in raising interest rates.

Rising growth forecasts for the UK also add to the increasingly rosy picture for the UK, progress on Brexit with the agreement of the transitional phase has also added to the buoyant mood. Whilst the current stance of the Bank is for a rate hike in May any serious changes in economic data could derail that.

A rate hike in May is now very likely but with that looking so likely, the Pound may not move much higher. The next 6 weeks of economic data ahead of the decision on May 10th will now be pored over for any signs of either caution from, or indeed signs of further hikes down the line. It would seem likely that with the UK and global economy forecast to grow further in 2018 and 2019, the Bank of England will continue to need to manage rising Inflation as the economy grows.

In my role as a specialist foreign exchange dealer my clients have been quick to utilise the forward contract option to lock in on the spikes and moves higher for the Pound. Whilst the longer-term forecast has improved lately, the uncertainty over Brexit and the fact the UK remains behind other leading economies in the growth stakes, indicates a risk averse approach. Locking in the higher levels still remains the most sensible option to manage your currency exposure and volatility from the Bank of England and interest rate changes.

Robert Vaudry, Investments Managing Director, Wesleyan:

With two members of the Bank of England’s monetary policy committee voting to raise interest rates it is becoming more likely that at least one increase will take place this year, probably as early as May.

Whether the era of ‘cheap money’ has finally come to an end remains to be seen. Any rise will be welcomed by savers who will potentially see an increase in rates on saving accounts, but the cost of borrowing will increase too. Those on variable mortgages could experience higher interest rates for the first time and need to understand the financial implications this could have. However, it is important to remember that even with the interest rate rises expected, interest rates remain low by historical measures and below the rate of inflation.

It’s also important to not become complacent and we’d advise everyone to remain mindful that there may be uncertainty in the months ahead, especially as stock markets remain volatile.

If you have thoughts on this, please feel free to comment below and let us know Your Thoughts.

With the recent interest rate rise, from mortgages to savings, the public is still awaiting movement in the financial sphere. Below Paul Richards, Chairman of Insignis Cash Solutions, explains to Finance Monthly what 2018 holds for savers.

The Bank of England November rate rise has triggered a waiting game among banks. The government’s move to extend the rise to NS&I savers puts more pressure on competitors to do the same, but savers have still only seen the full benefit with a handful of banks. Most banks are still waiting to see what competitors do, or passing on only a fraction of the rise.

Some economic commentators point to two further interest rate rises in 2018, but protracted Brexit negotiations could delay this. If the Bank of England hikes rates again, it will once more be the government’s decision on NS&I rates that influences whether other banks will follow.

No savings provider wants to pay more interest than they need to, as it has a direct impact on their profitability. Margins have been compressed heavily since the global finance crisis and banks don’t want to see them fall further. Challengers are more hungry to grow their balance sheets via retail deposits, so we’ll likely continue to see better rates from these players than the traditional larger banks.

February 2018 will see the end of the £100 billion term funding scheme, a source of cheap borrowing for banks. Once this scheme is closed, appetite for retail deposits will increase, prompting more competitive rates in the market. Longer term the impact will be even more significant, banks have four years to repay money to the scheme, and will need to rely on retail deposits for some of these funds.

For several years a large amount of banks’ budgets and human resources have been dedicated to managing regulatory change. This drain has likely prompted unintended consequences for consumers; if banks hadn’t had to spend so much money on implementing new regulation, would we have seen the same level of branch closures?

But there are huge benefits from regulation, driving increased consumer protection and access to better deals. Open Banking and PSD2 are the most interesting areas to watch - both open up, with consumer consent, bank transaction data to power new financial tools. These will help people better manage their money and access the right deals for them. A wide range of fintechs across the UK, including Insignis, are working hard to develop new solutions and over time consumers will feel a real benefit to their day-to-day lives.

Some banks are further advanced with their Open Banking plans than others, and there are challenges to grapple in terms of data management and security; however, there’s no question that 2018 will be a year of huge advances that give consumers more control over how they manage their money.

Today reports indicate the FTSE closed on a record high yesterday, outperforming its already high record from Friday last week, following the Bank of England’s anticipated decision to raise interest rates from 0.25 to 0.5% last week.

The truth is, this changes a lot, from mortgages to bonds. Below Finance Monthly hears from many sources on Your Thoughts, how consumers should behave, how banking may evolve, how profits can change, what might happen to the pound in weeks to come and so forth.

Anthony Morrow, Co-Founder, evestor.co.uk:

In theory, the rise in the interest base rate should mean that consumers get higher interest rates on their savings. However, people shouldn’t get too excited about this. It often takes many months for the changes to be felt in savings accounts, and even then, the increases in savings rates can be marginal and may take years to build into noticeable rates of anything over 3%.

Consumers should also consider that the increase in base rate still means that their cash savings are playing catch-up. The past decade of interest-rate squeezes has meant that the value of cash savings have dropped instead of increasing in value.

The best course of action is for consumers to spread their savings and investments, and to look for alternatives to the traditional high street savings accounts and cash ISAs. It’s now easier than ever for consumers to invest money via the internet in stocks, shares and global investment funds that could generate average returns of between 5% - 7%. The key thing though is to ensure people get advice about what to do with their money before they part with their cash – this isn’t always readily available – and to check any charges that they’re likely to incur for making investments. In some cases, excessive fees can eat massively into the investment returns, sometimes by as much as half.

Gianluca Corradi, Head of Banking, Simon-Kucher:

Investors with shares in UK banks can cheer as the rate increase will boost the operating profits in the retail banking industry by £274 million over the next 12 months. This 3.1% increase in the operating profit of the banks will be positive news for the shareholders as the U.K. banks have had their profitability squeezed in a low rate environment despite numerous cost cuts and efficiency increase measures.

The gain for shareholders is expected to come as banks increase the lending rates immediately but deposit rates only gradually and by a lower amount. We can expect the banks to immediately increase the interest charged on new loans and those on variable rates by the full 25 basis points (bps), giving a boost of about £1.26 billion in their interest income for the coming year. Concurrently, the interest expense on deposits is likely to rise by just under £1 billion as the rates for savers rise over time.

Consumers can expect modest returns on their deposits as rates, though higher, will still be low in absolute terms. For instance, a saver who manages to get the entire 25bps increase on £10,000 of deposits, would stand to make an additional £25 over a year.

Paresh Raja, CEO, MFS:

In light of rising inflation and stagnating economic growth, the decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.

Angus Dent, CEO, ArchOver:

This rate rise of 0.25% is largely symbolic. At the same time, it’s also a year too late. Dropping the interest rate below 0.5% was the wrong decision in the first place. The Bank should have pushed rates up to 0.75% as a show of strength that would have driven inflation down as the pound rose.

Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy. For many, the move towards a higher interest rate will simply mean business as usual.

Following the financial crash, there is a hunger to make up for ten lost years and UK savers and investors are finally waking up to the realisation that they need to chase higher returns. With interest rates remaining below 1%, this means looking for opportunities to branch out beyond traditional vehicles and introduce greater diversity into portfolios to secure a higher yield.

Emmanuel Lumineau, CEO, BrickVest:

This announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.

Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.

Uma Rajah, CEO, CapitalRise:

The Bank of England’s decision to raise its base rate of interest from 0.25% to 0.5% might superficially look like good news for savers, who have had to live with near non-existent returns on their deposits for some time. But in reality it is highly unlikely that banks will actually pass on much — if any — of the rate rise to their customers. It’s more likely they will act to increase their margins, focusing on improving their own profitability rather than doing what’s best for customers. Savers should take note and look for alternative, more lucrative, ways to grow their pot with minimal additional risk. While the base rate will continue to rise over the next 12 to 18 months, it could be some time before banks pass on the benefits.

Meanwhile, the rate rise is bad news for property developers and borrowers that are using banks to finance their loans. Banks charge based on a margin to LIBOR, which will go up in line with the base rate rises. Combine this with other longstanding challenges in securing finance from banks for real estate projects in the current climate, and property borrowers will be much better off looking at more innovative sources that can deliver finance more quickly and offer better value — particularly if the rate continues to rise over the next 12 to 18 months.

James Bentley, Trader, Learn to Trade:

Following the Bank of England’s announcement that interest rates are rising by 0.25%, the British central bank will hike borrowing costs for the first time in more than 10 years due to the recent surge in inflation.

Many economists have warned that the time is not right for a hike as recent data has painted a subdued picture of the economy while uncertainty over how Britain's withdrawal from the European Union will play out remains. With Brexit negotiations still underway, British consumers should prepare themselves for further fluctuations to interest rates over the next year.

The pound has pushed higher against the dollar in early trade, while London's FTSE100 searched for direction ahead of the announcement. Although the announcement has created uncertainty, we expect inflation to drop to 2.2% by 2020 - where the rate will stagnate and hold for a period of time.

Paul Davies, Director, Menzies LLP:

Even though the rate rise was well signposted by Mark Carney, it will bring hardship for businesses that rely on consumer spending.

Consumers are always wary of a rise in interest rates and we may see the retail industry experiencing a bumpy ride as UK shoppers tighten their purse strings. Businesses can defend against the effects of turbulence by ensuring cash management is a top priority, managing creditor payments and adapting to changes across the supply chain.

Consumers and businesses will be hoping that after the announcement, any further interest rate rises will be staved off until well into the New Year.

Mihir Kapadia, CEO and Founder, Sun Global Investments:

The Bank of England has given in to the rising inflation, which has been above their 2% target and peaking at 3%, by raising interest rates for the first time in a decade. While the interest rate hike bodes well to support the pound, it also increases the borrowing costs for consumers and business. It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious loop, especially as Brexit woes continue to weigh down on the UK’s economy.

The last the time the Bank of England had increased the interest rates was in July 2007, when it pushed the cost of borrowing to 5.75% months before cutting them during the onset of the financial crash of 2008. This increase comes at a time when the economic framework has stabilised and careful credit scrutiny is in place to prevent another crash. The interest rate hike may well deter consumers from accessing cheap credit, which will bode well for the financial watchdogs.

The next interest rate hike may well take a while, until further clarity emerges on Brexit’s impact on the UK economy. Until then 0.5% is the only sword to battle 3% inflation, and curtail it from strengthening any further.

Frazer Fearnhead, Founder and CEO, The House Crowd:

I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors as they will have given to helping people maintain their mortgage repayments and loan agreements”. He added “For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers.

Gregg Davies, Company Director, IMA Financial Solutions:

We all talk about the winners and losers when Bank of England interest rates are mentioned. Of course, if you have savings on deposit in variable rate accounts, or a variable rate mortgage you could be affected directly.

Many are asking, will the rate rise make my mortgage more expensive? Most mortgage lenders offer fixed or variable rate mortgages, and many have already adjusted their fixed rate deals ahead of the speculation over an interest rate rise. Variable rates are either based on a lender’s own set variable rate or linked directly to the Bank of England – called trackers.

We have now had nearly eight years of unprecedently low rates - for a generation of first time buyers, low interest rates are all they have known.

Mortgage holders have taken the low rates on board, and today it is estimated that over 70% of mortgages are fixed rate deals – compared with a low of under 40% in 2001. On a day to day basis this is reflected in my own clients’ decisions.

Rob Douglas, VP of United Kingdom and Ireland, Adaptive Insights:

For many businesses across the UK, the rise in interest rates and subsequent fall of the pound will require action. Companies are operating in the midst of a volatile market, where the sterling went from being at its strongest since the Brexit vote, to taking an immediate tumble after the rise in interest rates was announced. This market instability can upend budgeting and forecasting, making it difficult for finance and management teams to devise an accurate financial plan and make business-critical decisions.

Economic and market volatility require businesses to be as agile and adaptable as possible to ensure their financial planning models reflect changing assumptions and conditions. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins. What’s more, businesses should prepare to be more responsive by running ‘what if’ scenarios in advance that will, for example, reveal the impact the rise in interest rates could have on their business, allowing them to make better, faster decisions.

Ultimately, it is the companies with sound financial planning processes in place that will have a better chance at success when volatility strikes.

Johan Rewilak, Economics Expert, Aston Business School:

Since the crisis of 2007, interest rates have been at record lows, and whilst this hike has only moved them back to pre-Brexit levels, the larger worry is about any future potential rises.

Since the decision has been made, Mark Carney and the MPC have already faced lengthy criticism about how the rate hike will impact the economy. There are those who believe recession is around the corner and that there was a desperate need to maintain interest rates at the 0.25% level to prevent this.

Those advocating the rise have done so by optimistically looking at data that shows unemployment has fallen to levels unseen since the 1970s and that the rate of underemployment (those working part-time who wish to work longer hours) has dropped. Nevertheless, wage growth (a metric of longer term inflation) has remained subdued.

My concern is and will be surrounding financial stability. Household indebtedness and mortgage to income ratios are at troublesome levels and any hikes in interest rates mean higher repayments. If the interest rate hikes lead to recession, this will only magnify these issues and have cataclysmic effects on the financial system as it did in 2007. Whilst, higher rates may put people off from future borrowing, there is a tricky trade-off surrounding those already highly indebted.

The upshot of this rate rise is that at least Mark Carney has two rolls of the dice if Brexit negotiations or the economy starts to sour before negative interest rates become a possibility. That being said, why would anyone raise interest rates that may create a recession just so they have the ability to lower interest rates and to try cure the problem

John William Gunn, Executive Chairman, SynerGIS Capital PLC:

This was widely anticipated by the wholesale markets following the language of the MPC’s September statement. The main question mark was over any Brexit-related outlook uncertainty. As the market had been positioned for this rise a failure to follow through could have caused the MPC credibility issues and sparked yet more speculation around Brexit headwinds to the economy.

For the general public, the good news is that more people are on fixed rate mortgages than ever so the effects for homeowners should be subdued. More people are renting and many households are lucky enough to be mortgage-free. As mentioned in the MPC statement, debt servicing costs paid by British households would remain "historically very low" despite this hike.

It’s not so great for first time homebuyers (many mortgage deals were withdrawn in anticipation of the BoE’s move) but attention now turns to whether the Chancellor can offer any stamp-duty concessions in the Budget on 22^nd November.

It's good news for neglected savers and the retired. While still low, retirees shopping around for annuities should already be seeing improved rates. Not all high street banks will be passing this rate rise onto their savers. Some committed ahead of the decision but they were in the minority.

As with the FOMC (the Federal Open Market Committee = equivalent of the MPC) in the US, the first interest rise is psychologically important, as it reminds borrowers that base rates for the last 10 years are not at “normal” levels. It should not be forgotten that for the U.K this is just a reversal of the post-Brexit-result emergency cut in Aug 2016. Any pre-Christmas consumer sentiment change may affect spending at high street retailers who have had mixed trading results recently. As with the U.S central bank guidance, we expect any rate rises over the coming years to be on a slow and gradual basis.

Given the modest growth forecasts issued by the MPC and their expectation that inflation with peak at 3.2% in the October CPI release, we do not anticipate any further tightening from the MPC until Q3 2018. The Brexit influence is unlikely to go away soon, as noted by the MPC in their statement.

Duncan Donald, CEO and Head of Trading, London Academy of Trading:

Last week we saw the UK MPC and Mark Carney deliver a rate hike in the UK to 0.5%, the first hike since the financial crisis in 2007.

It came as little surprise, with the market pricing in a 90% probability of this action prior to the announcement on “Super Thursday”. The act of hiking rates is perceived as ‘Hawkish’ and would typically drive the currency higher, but the price action reflected this was all but priced in.

The other positive element of the meeting, was the split of the voting members of the committee. The result was 7-2, showing that 7 members of the committee were in favour of the hike, with just 2 members dissenting. Forecasters had thought the split may be tighter, with a 6-3 or 5-4 majority to hike. These being the first two factors announced to the market, saw the pound appreciate half a cent against the dollar from 1.3220 to 1.3270. This move was sharply unwound as the market plunged over 2 cents to 1.3040.

The driver was the announcement that Mark Carney and his committee anticipates just two subsequent hikes, and not in the next year but over the next 3 years. This signified that in the short term we are very much looking at the ‘one and done’ scenario. The fears of Brexit and the unknown have perhaps rightly got the committee apprehensive of doing too much too soon. This was further underlined at the weekend, with comments from Mark Carney regarding fears of inflationary pressures that could be caused if we were to leave the EU without a deal.

Market traders and investors still question Carney’s ability to actually deliver what he says he will, in this case to raise interest rates. This was the market opinion in the UK and in his previous position in Canada. He delivered on the interest rate hike, but as the markets reflect, it was done in the most dovish of manners.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Following the first increase in the Bank of England’s base rate in over 10 years, MoneySuperMarket’s money expert Sally Francis here provides some guidance for people who might be affected.

Sally said: “There’s been very little movement in the Bank of England base rate since 2009 so it’s understandable that most Brits aren’t sure how a shift could affect their finances. The 0.25% rise might seem small, but it could pave the way for a string of increases that could impact some of the biggest bills. We’re encouraging people to take control of their finances today and learn how any future changes could affect their money.

“A rise in the base rate, coupled with the end of the Funding for Lending scheme - a Bank of England incentive for financial institutions to borrow cheaply from it -  early next year is good news for savers, but if you’re on a tracker mortgage your monthly instalments will rise as soon as any base rate increase is announced. If you’re on a capped or discount mortgage, you could also see increases so acting immediately could save you thousands in the long run, especially if base rate continues to rise. Switching to a fixed rate mortgage ensures that your monthly repayments stay the same for the duration of your fixed period, providing certainty and stability in your finances.”

For those with variable mortgages, the base rate rise might lead to higher monthly repayments, so here are MoneySuperMarket’s top tips:

1. Cheaper mortgage - If you’re on a variable rate mortgage, you could switch to a cheaper deal. But you might incur fees and charges, so work out whether it’s really going to save you money
2. Offset option - You could ask your lender about ‘offsetting’ your mortgage. This is where your savings and current account are stacked up against what you owe, and you’re only charged interest on the balance. Mortgage = £200,000, savings = £15,000 – you pay interest on £185,000
3. Switch energy - If you’ve never switched provider or haven’t done so for several years, you’re probably on a standard variable rate tariff. Switching to a fixed rate deal could save you hundreds of pounds a year
4. Don’t auto renew - Car and home insurers love it when you renew with them. Instead of rewarding your loyalty they often punish you with a price hike. So be a new customer every year and get the best deal in the market.
5. Max your bank account - Been with the same bank for years? There’s a new breed of current account that pays interest or gives rewards for certain types of spending. And you might get a £100+ cash incentive to switch.

(Source: MoneySuperMarket)

In June the UK’s inflation rate dropped unexpectedly to 2.6%, down from 2.9% in May. This comes as a surprise given the socio-political situation globally and in the UK, giving spout to the alarming degree of uncertainty businesses and the public are facing.

According to the Office of National Statistics (ONS), this was the first fall in inflation since October 2016, and was mostly due to lower petrol and diesel prices. Economists are now reportedly saying that this could cause the Bank of England to raise interest rates.

Below Finance Monthly has sought out several experts who could give their thoughts on the inflation fall, and what’s to be in months to come.

Markus Kuger, Senior Economist, Dun & Bradstreet:

The unexpected fall in the UK’s inflation rate is another sign of the economic uncertainty the country faces in the current political climate. Our analysis shows that the level of risk is ‘deteriorating’, with Brexit negotiations creating considerable unpredictability for businesses operating in and with the UK. This has only been intensified by the results of the general election in June, as the government’s narrow parliamentary majority is further complicating the process of leaving the EU.

Alongside the backdrop of an already slowing economy (the UK posted the lowest real GDP growth of all 28 EU economies in Q1 2017), a poll of business leaders after the election indicated a notable drop in business confidence. The best advice for businesses is to closely monitor the economic climate and the progress of EU negotiations, and use the latest data and analytics to assess risk and identify potential opportunities. As Brexit negotiations progress organisations should get a clearer picture of the future, but until then careful management of relationships with suppliers, customers, prospects and partners will be key to navigating through these uncertain times.

Kate Smith, Head of Pensions, Aegon:

Rapidly rising prices are almost always bad news for consumers, particularly pensioners on a fixed income, who are clearly having to go through a bit of belt tightening at the moment. The problem is amplified by both low wages and low interest rates, which give people little opportunity to grow their savings to meet the growing cost burden. There are lots of options available for people that want to diversify their investments outside of rock bottom savings account, but it’s important to plan ahead, and if dealing with significant amounts, consider seeking the input from a financial adviser.

Many of the younger generation seem to be prioritising current lifestyle over long term savings ambitions, and there’s nothing wrong with that in principle, but as inflation begins to bite it’s important they don’t start to see saving as an unaffordable luxury, and even consider sacrificing their workplace pension. By far the most effective means of saving is to do so early, and often, and there’s a risk that reducing regular contributions becomes a habit that’s hard to reverse.

Ranko Berich, Head of Market Analysis, Monex Europe:

Real wages remain in contraction and inflation is above target, but not above the BoE’s expectations. June’s inflation slowdown significantly reduces the chances of a near term rate hike as it vindicates the BoE’s last Inflation Report, and provides further fodder for the intensifying debate in the MPC about “looking through” the current inflationary shock.

The BoE’s last Inflation Report forecast inflation to peak around 3%, and this view remains intact after June’s CPI figures, although a marginal overshoot this year remains plausible. Although fuel prices were the main contributor to the slowdown, as a whole the release does not look immediately attributable to the sort of “transient factors” apparent in US inflation data, as several major basket categories made substantial negative contributions. Inflation in the UK is above target, but there’s nothing in June’s data to suggest an inflationary spiral of the sort that would entail an immediate rethink of monetary policy.

Sterling was looking rather frothy before the release, particularly against the greenback, and has been knocked down a notch as a result, as today’s release does reduce the likelihood of a hike in the immediate future. Thursday’s Retail Sales release will be crucial, unless consumer spending begins to recover from the shock seen in May it’s difficult to see how any of the centrist MPC members will be able to agree that policy normalisation is appropriate at any stage soon.

Edward Smythe, Economist, Positive Money:

While inflation may have fallen slightly in June due to lower fuel prices, it is likely that it will tick up back to 3% over the coming quarters. What should concern policymakers and businesses is that inflation is continuing to rise much faster than wages, which have only slightly improved in the decade since the financial crisis, putting pressure on households and forcing many on low incomes to rely on borrowing for everyday expenditure.

The Central Bank is in an increasingly difficult position. It may feel compelled to take action to meet the 2% inflation target, but raising interest rates could be catastrophic for an economy only growing weakly, and so reliant on personal borrowing and rising asset prices. This predicament highlights the need for policymakers to think seriously about new approaches to monetary policy which, unlike the current diet of quantitative easing and low interest rates, can help boost wages and reduce private debt.

Richard Flax, Chief Investment Officer, Moneyfarm:

With inflation at its highest level in nearly four years, you might expect that to increase the potential of an interest rate rise in the UK. But with wage inflation already lagging behind the latest Consumer Price Index (CPI), this isn’t necessarily a move that a lot of Brits could stomach. It’s now looking extremely unlikely that the Bank of England will increase interest rates in August.

Even if interest rates did rise, there is no way this could reach the levels that British savers are so desperate for, meaning those with excess savings sat in cash accounts should really start thinking about investing now to protect the value of their money over time. This is especially true for those saving for long-term goals such as retirement or helping their children through higher education. Millions of British savers could be in for a nasty surprise later in life if they find they can’t buy as much as they thought with their savings.

David Morrison, Senior Market Strategist, Spread Co.:

Sterling sold off sharply last week following the latest update on UK inflation. The headline Consumer Price Index (CPI) for June rose 2.6% when compared to the same period last year, and this was down sharply from +2.9% in May. Most of the decline could be blamed on a fall in oil prices and the British pound. However, inflation measures which exclude energy were also weaker, suggesting other factors were at play as well.

UK inflation has soared since the end of 2015 when year-on-year CPI was actually negative. Yet despite the pull-back last month it is still well above the Bank of England’s 2% target. Nevertheless, the consensus opinion seems to be that the pressure is now off the Bank to raise rates at next month’s key meeting. This is when the Bank’s Monetary Policy Committee (MPC) delivers its quarterly inflation report and is therefore a perfect opportunity to announce a change in monetary policy.

Before last week’s drop in inflation, many analysts expected a rate rise next month. For a start, there were a number of commentators who considered last year’s rate cut in the aftermath of the Brexit vote particularly ill-advised. Reversing it twelve months later would seem a sensible route to take.

This opinion gained traction after the MPC vote unexpectedly shifted from 7-1 against a rate cut to 3-5 in favour at their last meeting back in June. However, Governor Mark Carney is notoriously dovish, so he now has additional ammunition to urge caution from his colleagues next month. But the worry for Mr Carney and his dovish colleagues is that it’s dangerous to look at a single data point and extrapolate from it a change in trend.

If last weeks’ fall in inflation turns out to be a blip rather than the start of a steady decline, then it won’t take long for the Bank’s critics to accuse it of taking its eye off the ball.

Kerim Derhalli, CEO of invstr:

The UK has recently experienced a surge in inflationary pressure with, unsurprisingly, Brexit as the main culprit. As a nation, we love to consume foreign goods and the devaluation of the pound following last year’s referendum result made all of our imports more expensive. It also caused mayhem for economists and legislators looking to predict what is to come.

However, as the impact of this one-off devaluation event recedes, the inflation rate has started to level out and come down.

There are other economic factors too that are likely to put downward pressure on inflation. Wage growth has been lower than the overall level of inflation which has squeezed living standards forcing people to borrow more or spend less. Already low savings levels and high consumer debt suggest little capacity among Joe Public for higher prices. The uncertainty around the investment climate caused by Brexit has also impacted the housing market keeping both home prices and rents subdued. Outside of the UK, international energy prices continue to remain relatively low too helping to keep inflation in check.

What could change? One factor to consider is the current domestic political debate about higher domestic wage settlements in the public sector, which could help to drive up prices. Plus, as we learn more about the UK’s international standing in the world going forward, there are sure to be factors that economists haven’t even begun to consider that will throw their prediction models into disarray. Forecasting either growth or inflation rates is unlikely to get any easier anytime soon.

Jamie Smith-Thompson, Managing Director, Portafina:

Inflation is especially going to hit those pensioners with an annuity. Although there is an option to inflation proof an annuity when it is first taken out, most people decide not to factor it in because the benefit leads to such a reduction in income in initial retirement. Consequently, the majority of pensioners with an annuity will be on a a fixed income. The knock-on effect is as inflation increases, their purchasing power reduces. The longer you are in retirement the less money you will tend to have in real terms and sadly it is in later retirement when that money is needed for care and support. This is all a powerful reason why it is important that the triple lock remains on the state pension to provide some degree of protection.

One of the key questions people ask themselves as they consider their retirement is “How am I going to take the income?” and inflation and death benefits should be a primary factor to bear in mind when looking at what’s out there. The two primary options are drawdown or annuitys. If you want to factor in inflation-proofing into your annuity you could reduce your initial pension income by around 30%. Apart from the huge reduction itself, it is an unattractive proposition because most people are more likely to need greater income in the initial part of retirement, as this is when they are more active. For this reason, annuities are not as popular as they once were. Drawdown on the other hand takes inflation into account by default. Drawdown remains invested so if inflation goes up, the markets usually go up as well. It is far more flexible and it allows the owner much more control in terms of the state of the economy.

Adrian Slack, Senior Trader, Learn to Trade:

Since the UK's vote to leave the EU last year, the value of the pound has continued to depreciate. This stimulated an increase in the cost of imported goods and raw materials prompting an increase in inflation.

As the value of sterling continues to fall, households should expect to feel the pinch of higher costs on everyday imported goods in their baskets and on European holidays. Businesses should also expect to incur higher costs for doing business in Europe – they need to plan carefully when buying goods from overseas to lessen the blow on a potential fall in business profits. Exporters will continue to benefit as sterling’s fall makes UK goods more competitive overseas.

Moving forward, we expect inflation rates to creep back up steadily due to sterling’s continued weakness due to political risks resulting in higher import costs and fundamentally increases in prices to purchase. Whether this leads to a rise in interest rates is still to be confirmed. There’s an entire generation on low mortgage rates and so any increase in interest rates will have a negative effect on the housing market. We are in a bit of a catch 22 at the moment. With Brexit negotiations underway, it’s difficult to say how high inflation rates are likely to go.

Ana Boata, Economist for Europe, Euler Hermes:

June’s lower-than-expected inflation rate is mainly due to base effects linked to the summer discounting of some goods’ prices and the appreciation of the Sterling in April and May. These effects should already fade away in July and we expect the inflation rate to approach but remain below 3.0% year-on-year this autumn.

Looking towards 2018, the growing economic uncertainty surrounding Brexit will continue to hamper sterling. Increasing import costs will continue to put upward pressure on inflation, which will hit 2.7% on average in 2017 and 2.6% in 2018. This will act as a drag on consumer confidence and trigger a significant slowdown in consumer spending growth to 1.9% (from 2.8% in 2016) and 1.2% respectively.

GDP growth is expected to slow down to 1.4% in 2017 and 1.0% in 2018 which, coupled with the weakness of Sterling and the rise in inflation, would argue for a smooth rate hike in H2. This should support households’ real purchasing power and help avoid a sharp adjustment of the residential housing market.

From 2019, the level of inflation will be heavily influenced by the UK’s trading relationship with Europe. We forecast that a transition deal – where the Single Market conditions would still be kept for defined period of time – is the most likely outcome. This should be seen as a good news and help Sterling stabilise somewhat. Inflation should moderate slightly to 2.4% in 2019 and 2.3% in 2020. Without a transition deal, inflation would likely reach a high level of 3.5% in both of those years.

High levels of competition, increasing discounter market share and an online shopping frequency more than twice the European average have already made the UK retail sector of the most challenging in the world. In addition, growing financial stress, highlighted by a 10pp increase in net gearing ratios last year with average profits (EBIT) slipping by 1.4pp to 5.6%, is expected to place greater pressure on cash flow and payment terms throughout the retail supply chain.

Salvador Amico, Partner and head of the Brexit team, Menzies LLP:

The fall in the rate of inflation has come as a surprise but businesses, consumers and the Bank of England alike are unlikely to be celebrating too much at this stage.

Future economic and market-driven volatility is still expected. Inflation rates could creep back up and the pound will remain volatile, hindering long-term investment plans. To avoid losing out, businesses should take steps to minimise their exposure to such volatility by re-assessing their supply contracts, distribution networks and hedging against currency fluctuations.

To date, there has been a reluctance from businesses to pass on extra costs to the consumer in the form of price rises, but this could become harder to avoid in future. In the meantime, businesses will remain focused on removing cost where it is possible to do so by renegotiating contracts and relocating supply chains closer to home.

Inflation rate fluctuations are usually an indicator that change is on the horizon and speculation over whether the Bank of England is likely to raise interest rates in the coming months will also be causing concern. However, with consumers being squeezed on a number of levels and wage inflation continuing to lag, it would be surprising if interest rates rose before the end of the year. With the economy hugely dependent on consumer spending, taking disposable income out of their hands would be counterproductive.

One of the key challenges facing businesses at the moment is exchange rate volatility. By now, the impact of recent falls in the value of the pound have worked their way through the system and this could mean that the economy is starting to stabilise.

This has been a year of curveballs and, as we have seen, it can take just one shock change to unsettle the entire business community. For the time being, however, inflation rates appear to be moving in the right direction and we should be grateful for that, even if we know it is unlikely to last.”

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Today, the 5^th July 2017, marks the ten year anniversary of the last time there was an interest rate rise in the UK.

On this date in 2007, the Monetary Policy Committee voted to increase rates to 5.75%, just as the wheels were about to come off the global economy. A decade on from the last interest rise, the Bank of England is once again mulling a rate hike, though the current level of consumer debt leaves the central bank facing a tightrope walk on interest rate policy.

• 8 million Britons haven’t seen an interest rate rise in their adult life
• £1,000 cash in the bank is now worth £878 after accounting for inflation
• This compares to £1,323 from £1,000 invested in the stock market
• Money in non-interest bearing accounts has risen almost eightfold to £179 billion
• UK consumer borrowing is higher than on the eve of the financial crisis… and rising
• The Bank of England bind
• Charts and tables

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “It’s been a decade since the last interest rate rise, so it’s little wonder that borrowers have got used to the idea of cheap money. Indeed around 8 million Britons haven’t witnessed an interest rate rise from the Bank of England in their adult lives.

Low interest rates undoubtedly helped to prop up the economy in the wake of the financial crisis, by lowering the cost of debt for UK consumers and companies. However the burden of loose monetary policy has very much fallen on those with cash in the bank, who have seen the interest they receive wither away to virtually nothing.

Meanwhile the UK consumer has even more borrowing now than ten years ago, thanks to weak wage growth and the addictive nature of low interest rates. Rising house prices and the increased cost of a university education mean that the current generation of young adults are particularly accustomed to eye-watering amounts of debt.

There has been a sharp rise in consumer borrowing over the last year, and current conditions of weak wage growth coupled with rising inflation are likely to exacerbate the use of credit to fund living expenses. Indeed the savings ratio has now fallen to a record low, highlighting the squeeze currently facing UK consumers.

The fragile debt dynamics of the UK economy put the Bank of England in a bind, because while a rate hike would help to curb consumer borrowing, it will also make the existing debt mountain less affordable. The central bank therefore faces a tightrope walk between keeping borrowing levels in check, without putting too big a dent in consumer activity, which would have a damaging effect on the UK economy.

The Monetary Policy Committee has turned more hawkish recently, and expectations of a rate rise have built up considerably in recent weeks. However the large amount of consumer debt means that even when the Bank of England does finally decide to wean the UK off low interest rates, it will be a very slow and steady process.”

The cost for cash savers

Those with cash in the bank have now seen a decade of falling returns. £1,000 stashed in a typical instant access account in July 2007 would now be worth £1,107. However after factoring in inflation, which has risen 26% over the period, the real value would today be £878. By comparison the same £1,000 investment in the UK stock market in July 2007 would now be worth £1,666, or £1,323 after adjusting for inflation. (Returns calculated with interest and dividends re-invested).

This is a pretty astonishing result, seeing as this investment would have been made just as the UK stock market was about to fall by almost 50% as a result of the financial crisis. These figures highlight the healing power of time on stock market returns, even if you happen to be unlucky enough to invest just as conditions take a turn for the worse. The figures also demonstrate the toll taken on cash in the bank by such an extended period of low interest rates.

Indeed, over the last ten years the amount of money held in non-interest bearing accounts has risen almost eightfold, from £23 billion in 2007 to £179 billion today. At the same time the average rate on the typical instant access account has fallen from 3.3% to 0.4%, and the average rate on non-instant access accounts (including cash ISAs) has fallen from 5% to 0.9%.

(Sources: Bank of England, Thomson Reuters Lipper, Moneyfacts)

The benefit for borrowers

While cash savers have undoubtedly felt the pinch from lower interest rates, there have been benefits for borrowers which have helped support the economy. The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% today, helping to support household incomes and the housing market in the wake of the financial crisis. Unsecured consumer borrowing rates have fallen too. The result is much lower levels of consumer loan defaults. UK lenders have written off £2.5 billion of bad consumer loans over the last year, this compares to £6.8 billion in 2007.

Borrowing costs have also fallen for UK companies. The typical borrowing cost for a large company with a good credit rating has fallen from 6.4% in July 2007 to 2.8% now. This has allowed companies to gain access to funds cheaply, thereby supporting them in making investments and profits, and providing employment.

Low interest rates have therefore helped the economy by reducing the burden on UK consumers and companies. However it seems consumers are now increasingly taking advantage of low interest rates to load up on debt, which is causing concern at the Bank of England. Only last week the ONS published data which showed that the UK savings ratio has fallen to a record level of 1.7%, which suggests the consumer squeeze is beginning to hit home.

(Sources: Bank of England, Markit iBoxx)

Consumer credit warning signs

The Bank of England recently warned that consumer credit and mortgage lending were a key risk to financial stability in the UK. This is because there has been a rapid increase in consumer credit of late, which rose 10% over the last year. As a result the central bank is bringing forward an assessment of the banking sector’s exposure to potential losses stemming from stressed conditions in the consumer credit market.

In absolute terms, levels of UK consumer debt are actually higher now than they were on the eve of the financial crisis, a point in history when it is widely recognised that the UK was living beyond its means. Consumer borrowing (including credit cards, overdrafts and loans) now stands at £199 billion, compared with £191 billion in July 2007, and a highest ever level of £209 billion recorded in September 2008. Mortgage borrowing now stands at £1.3 trillion, up from £1.1 trillion in July 2007.

The good news is household income has also risen over this period, which along with low interest rates make this debt more affordable. In 2007, the household debt to disposable income ratio peaked at 159.7%. This fell back in the years following the financial crisis as consumers tightened their belts and banks became more reluctant to lend. However it has recently started to head in the wrong direction again, rising from 139.9% in 2015 to 142.6% in 2016.

The Brexit-induced currency crunch facing consumers at the moment can be expected to put further upward pressure on this ratio. With wage growth weak and inflation rising, consumers are more likely to rely on debt, while their disposable household income is likely to come under pressure. Indeed in its latest forecasts the Office for Budget Responsibility predicts this ratio will hit 153% in 2022.

(Sources: Bank of England, ONS, Office for Budget Responsibility)

The Bank of England bind

This all underlines the very difficult situation the Bank of England finds itself in. Raising rates will help to wean investors off borrowing, however it will also make the large existing stock of debt more expensive, which will eat into monthly budgets, putting downward pressure on spending and weighing on economic growth.

This is perhaps why the bank has so far chosen to use more specialised tools to deal with the sharp rise in consumer credit, such as tightening up mortgage lending rules and increasing bank capital requirements to deal with any downturn in credit conditions, rather than wielding the sledgehammer of an interest rate rise.

However, more members of the monetary policy committee appear to be in favour of a rate rise, which may mean we could soon be in for the first hike since 2007.  Markets are now pricing in a 55% chance of a rate rise by the end of the year. However the fragile debt dynamics of the UK economy mean that even when the Bank does decide to raise rates, it’s going to tread very carefully indeed.

It’s also worth pointing out that this wouldn’t be the first time that expectations of a rate hike have risen only to be subsequently quashed. At the beginning of 2011, two years after rates had been cut to the emergency level of 0.5%, the market was expecting interest rates to be at 3% by 2014.

Charts and tables

The data behind these charts is available on request.

Here’s a summary of interest rate data:

The stock market fell sharply in 2007 and 2008, but has since staged a significant recovery, while cash has been left in the doldrums:

Consumer credit fell in the wake of the financial crisis, but has started to pick up again and is approaching a record level; weak wage growth and rising inflation are likely to stoke the borrowing binge further:

Low interest rates have helpd the economy in a number of ways, not least by making mortgage payments more affordable, which has helped to underpin the housing market:

Sources: Bank of England, Thomson Reuters Lipper, Nationwide, ONS

(Source: Hargreaves Lansdown)