Interest Rate Rise - a good idea ?

[Islineclear3_1]

If I was in charge, I would scrap Cash ISAs, and increase the personal savings allowance significantly to, e.g. £10k per annum.

Cash ISA rates are not competitive because they are more costly for banks to operate than normal savings accounts, due to additional HMRC reporting and compliance requirements.

Yes, I would bring back the TESSAs !

 

[Howardh]

If I was in charge, I would scrap Cash ISAs, and increase the personal savings allowance significantly to, e.g. £10k per annum.

Cash ISA rates are not competitive because they are more costly for banks to operate than normal savings accounts, due to additional HMRC reporting and compliance requirements.

Yes, the personal allowance I think was around £5000 (??) and it got slashed to £1000; which is fine for most when interest rates are low, but now they are rising more and more will be paying a significant amount of tax on their savings.

Example, £50,000 @ 0.5% = £250pa - well below the tax threshold so no tax
That at 3.5% = £1750 = £750 taxable = £150 tax.

Someone might think "ah, yes, you are paying tax but you are still £1350 better off..." well no as inflation has more than wiped that off. If inflation is 10% then every year your savings are being eroded by 6.5% in that senario + the extra loss of tax.

'm sure most Banks and Building Societies will have no or little delay in increasing their mortgage rates for people with no fixed rate mortgages but really slow at increasing savings rates!! My Nationwide Instant Access ISA account is still on a pathetic 0.15 interest!

Don't sit on it..move it - it's instant so fina an account nearer 2% or more!

 

[Mcr Warrior]

Who remembers TESSAs?

Replaced by ISAs in c. 1999.

Think investment in a TESSA was limited to an overall £9,000 per person, this over a five year period.

Can't really compare the headline rates available on TESSAs in the late 1990s with that on ISAs now as the interest rate environment is somewhat different.

 

[jfollows]

There is increasing speculation that the Bank of England will raise interest rates again very shortly, in response to the "decline" of the pound coupled with the novice Chancellor's ill-advised comments that he's thinking of reducing taxation even further in the near future (with no obvious means of funding the reductions).
I don't care especially about the "value" of the pound but its recent fall in value against other currencies is bound to feed through as even higher inflation very quickly.

Near-term predictions are for a rise of 1.75% by November [EDIT In other words, to rise to 4% from today's 2.25%, which was only increased from 1.75% on 22 September, last Thursday], exacerbated by the most recent rise being "only" 0.5% in the face of a 0.75% rise in the US Federal Reserve interest rate on 21 September.

The speculation has temporarily stopped the pound‘s “value“ falling further.

 

[Howardh]

There is increasing speculation that the Bank of England will raise interest rates again very shortly, in response to the "decline" of the pound coupled with the novice Chancellor's ill-advised comments that he's thinking of reducing taxation even further in the near future (with no obvious means of funding the reductions).
I don't care especially about the "value" of the pound but its recent fall in value against other currencies is bound to feed through as even higher inflation very quickly.

The £ reached 1.088 earlier today against the Euro and 1.04 to the dollar, slight recovery since. Think the last time there was parity - or near parity - with the Euro was possibly the financial crash of 2008? Couple of near misses since, Brexit vote and covid (Mar 19 2020) where tourists* would be offered less than 1 euro.

*In theory, tourism had been "banned" by covid at that point of course.

Edot Sky news ticker states this is the lowest ever v the dollar.

 

[Wynd]

Genuine question, but why does anyone save money in the bank anymore? The rates are derisory and there exists a universe of vanilla products that will give you 5% return pre year in the market with minimal risk.

Is it a poor appreciation of risk itself, that the biggest risk you can take in investing is failing to grow the funds?

 

[Bletchleyite]

Genuine question, but why does anyone save money in the bank anymore? The rates are derisory and there exists a universe of vanilla products that will give you 5% return pre year in the market with minimal risk.

Is it a poor appreciation of risk itself, that the biggest risk you can take in investing is failing to grow the funds?

1. It's more complicated than the bank
2. Most people are fairly risk averse with money

If banks offered a savings product based on that but with the rate just dropping to zero if returns are poor (i.e. the bank insuring the original capital, effectively) I reckon people might choose it.

 

[Howardh]

Genuine question, but why does anyone save money in the bank anymore? The rates are derisory and there exists a universe of vanilla products that will give you 5% return pre year in the market with minimal risk.

Is it a poor appreciation of risk itself, that the biggest risk you can take in investing is failing to grow the funds?

1. It's more complicated than the bank
2. Most people are fairly risk averse with money

If banks offered a savings product based on that but with the rate just dropping to zero if returns are poor (i.e. the bank insuring the original capital, effectively) I reckon people might choose it.

I have a fair bit in savings and one set of shares. The key is banks are easy to deal with, follow the rates and move as and when. The phrase "minimal risk" is not "no risk"! At least with a bank or building society there is an £85k guarantee.


Next year, for the first time since I owned shares, I expect the interest (after tax!) on my savings to be greater than the "interest" on my shares (the dividend). Might be time to consider selling my shares and putting the capital in the bank, but there are tax complications which put me off (ie I might not be better off).

 

[DelayRepay]

Genuine question, but why does anyone save money in the bank anymore? The rates are derisory and there exists a universe of vanilla products that will give you 5% return pre year in the market with minimal risk.

Is it a poor appreciation of risk itself, that the biggest risk you can take in investing is failing to grow the funds?

1. It's more complicated than the bank
2. Most people are fairly risk averse with money

And 3. Even people who do invest need to hold some funds in cash for short-term needs. I have some money invested but would not wish to have to liquidate my investments in the short term as I will make a loss. So I hold cash to deal with things like the new car I want to buy at some point in the next 12 months, or to pay to have the roof mended if it starts leaking, or whatever.

If banks offered a savings product based on that but with the rate just dropping to zero if returns are poor (i.e. the bank insuring the original capital, effectively) I reckon people might choose it.

There used to be some Structured Products that basically did this. By and large they no longer exist for retail investors. I believe they became commercially unviable.

 

[jfollows]

I think inertia plays a part as well, people don't look to do new things with money and continue with what they've previously done.
I've got a "waterfall" of a stocks/shares ISA, a separate savings account which pays some interest, a bank savings account which pays very little interest and a current account, and I move money down the waterfall when I need to, and I put money when I have it into the top tiers.
Since it's all managed online it's easy enough to do.
The bank savings is a joke interest rate but it's still good discipline to use it and I run my current account down to pretty much zero. However I dislike debit cards and never use them so I have very few unplanned withdrawals from my current account. Plus text alerts set up in case I accidentally go overdrawn which I can fix on the same day without penalty.
I also contract out management of my pension (SIPP) to some people I trust, for which I pay. I'm happy with the arrangement.
Cash ISAs are something to avoid pretty much - I had one a couple of years ago when I had a bill to HMRC due in January so I set up a cash ISA and paid monthly amounts into it. I think I made £5 in the end, but I didn't want to hand over the money sooner than I had to and made a token amount of interest on it during the period.

 

[Dai Corner]

Cash ISAs are something to avoid pretty much

Although there is no tax advantage for the majority of people at the moment, there may well be in the future if interest rates keep rising and the interest payable on on non-ISA savings exceeds the savings allowance.

 

[jfollows]

Although there is no tax advantage for the majority of people at the moment, there may well be in the future if interest rates keep rising and the interest payable on on non-ISA savings exceeds the savings allowance.

For sure, it's all about avoiding inertia and changing plans to suit changing circumstances, isn't it? So much business relies on people not doing this. I know that my "best in the market" instant access savings account no longer is, so I'm going to have to change it .... when I can be bothered!

 

[Sm5]

Does the government really care about the £ though ?

ever since the 1970’s the £ has been in slow decline, we had a few good years between. 2004-7 and brought in tons of investment as the EU market properly opened up and US companies rushed to set up their European bases in the UK.
Since 2016 those bases have largely moved to Europe And so the capital outflows and declining £ show that trend continuing where it left off.

The choice the government had was watch the. £ crash as the economy fails and inflation goes into pre joining the EU territory, or hold up the economy and sacrifice the £ yet again.

it was obvious the. £ was going to crash either way, the clues to government thinking is in those sweetners to the housing market, which were outliers to the rest of the package… as they know interest rates are about to balloon.. however I doubt it will save the. £ /$ exchange, those global events of the USD are out of the governments control, but what it will do is draw down inflation via the back door as spending power will go, but moving the property tax bar up a little means the fall in housing prices will go to those higher levels and keeps that cash out of general circulation and in mortgages…thus propping up the currency a little.

Inflation though will hurt, i’d fill my car if I were you… 10% hike in USD denominated fuel prices is coming.

 

[Dai Corner]

For sure, it's all about avoiding inertia and changing plans to suit changing circumstances, isn't it? So much business relies on people not doing this. I know that my "best in the market" instant access savings account no longer is, so I'm going to have to change it .... when I can be bothered!

My savings provider allows easy switching between products from different banks with a good choice of rates and terms without the hassle of complying with the money laundering regulations every time. I really ought to be reviewing my deposits instead of talking about it here!

 

[jfollows]

The pound was at £1=$2 in the early 1990s, but relatively soon after it had been closer to £1=$1, so it's volatile now as then [EDIT 2.00 in 1991 and 1992, 1.05 in 1985]. The G5 intervention then "supported" the pound and I think that sort of concerted external action is less likely today.

The latest suggestion I have seen is that the Bank of England could increase its base rate from 2.25% to 3% after an emergency meeting soon, and then to 4% at the scheduled meeting on 3 November.

EDIT I remember the £1=$2 because I was living in the USA at the time and bought a new car with what was effectively UK money to me, so what I was able to buy in the USA was streets ahead of what I'd have been able to buy for the same price in the UK at the time.

 

[Snow1964]

Does the government really care about the £ though ?

The new Chancellor seems to have forgotten that oil and gas are priced in dollars, and as we are net importer, everyone’s energy costs will go up.

International shipping and many raw materials are priced in dollars, so cost in pounds goes up and have more inflation.

And items like grain and hops which we import will cost more in pounds, so food prices and (of interest to some on here) beer prices will go up.

So the new Chancellor is strangely going for a rise in inflation policy.

Back at the start of the year Government could borrow (10 year) at close to 1%, after drifting upwards for months, has jumped to 4.2% today and could easily hit 6% by the Spring. Just imagine if your mortgage interest quadrupled, that is what Government is now facing on new borrowing. Normal behaviour would be cut back on borrowing, but KK is doing opposite and it will cost everyone a fortune over next decade trying to pay it off.

 

[Dai Corner]

The new Chancellor seems to have forgotten that oil and gas are priced in dollars, and as we are net importer, everyone’s energy costs will go up.

International shipping and many raw materials are priced in dollars, so cost in pounds goes up and have more inflation.

And items like grain and hops which we import will cost more in pounds, so food prices and (of interest to some on here) beer prices will go up.

So the new Chancellor is strangely going for a rise in inflation policy.

Back at the start of the year Government could borrow (10 year) at close to 1%, after drifting upwards for months, has jumped to 4.2% today and could easily hit 6% by the Spring. Just imagine if your mortgage interest quadrupled, that is what Government is now facing on new borrowing. Normal behaviour would be cut back on borrowing, but KK is doing opposite and it will cost everyone a fortune over next decade trying to pay it off.

On the other hand, the value of the total debt will decrease.

Those prudent or fortunate enough to have accumulated wealth will see its value decrease too. Effectively we'll be paying off the national debt.

 

[Sm5]

The new Chancellor seems to have forgotten that oil and gas are priced in dollars, and as we are net importer, everyone’s energy costs will go up.

International shipping and many raw materials are priced in dollars, so cost in pounds goes up and have more inflation.

And items like grain and hops which we import will cost more in pounds, so food prices and (of interest to some on here) beer prices will go up.

..

agreed, but that is an invisble problem.. it isnt taxation, wage or benefits related. It might mean less spending power, but the rise in prices restores the lost tax take. it just means if youve got £10k to spend youve still got £2k in tax but just getting less stuff for your money.

KK is doing opposite and it will cost everyone a fortune over next decade trying to pay it off.

Who says its a decade ?

I suspect 100 year bonds and such may yet be re-invented.
Covid could still be used as an excuse to mop up Brexit related debt.. if it worked for the napoleonic wars, it could be used for the 4 once in a life time events that just occured in the last 1 and half decades.

 

[RailWonderer]

The interest rate needs to be raised to the historical average of 6% straight away. The purchasing power of the £ needs to be maintained, especially as we are a country that mostly imports while exporting little. I wouldn't be suprised to see New York and Asia dump the £ more in the coming weeks and months even. Kwarteng is a banana republic chancellor.

As said upthread, the £ has been in slow decline since the 60s and the only time we do well against the USD is when they fight a war in the Gulf or Iraq.

 

[Nicholas Lewis]

The new Chancellor seems to have forgotten that oil and gas are priced in dollars, and as we are net importer, everyone’s energy costs will go up.

International shipping and many raw materials are priced in dollars, so cost in pounds goes up and have more inflation.

And items like grain and hops which we import will cost more in pounds, so food prices and (of interest to some on here) beer prices will go up.

So the new Chancellor is strangely going for a rise in inflation policy.

Back at the start of the year Government could borrow (10 year) at close to 1%, after drifting upwards for months, has jumped to 4.2% today and could easily hit 6% by the Spring. Just imagine if your mortgage interest quadrupled, that is what Government is now facing on new borrowing. Normal behaviour would be cut back on borrowing, but KK is doing opposite and it will cost everyone a fortune over next decade trying to pay it off.

The smart money will have hedged forward months ago when it was obvious how this was going to play out. Oh and not forgetting the likes of Crispin Odey who again has massively cleared up on betting against the pound because he knew what Kwarteng was going to do not because he was given the nod but the fact is Kwarteng worked for Odey before coming into politics so he's influenced his thinking and could second guess what was going to happen.

 

[jfollows]

Evening Standard (https://www.standard.co.uk/news/uk/...m_campaign=breaking-news-ticker&itm_content=4):
So maybe not 6% today but not unlikely in the near future.

Bank of England ‘considering emergency statement’ this afternoon after pound hits record low against dollar​

There is speculation the Bank may need to increase rates by as much as one percentage point to 3.25% to steady the falling pound.

The Bank of England is reported to be considering making an emergency statement on Monday afternoon after the pound dropped to its lowest ever level against the US dollar.
The reports emerged hours after sterling hit its lowest level against the dollar since decimalisation in 1971, falling by more than 4% to just 1.03 dollars in early Asia trading before rebounding to 1.09 dollars on Monday afternoon.

Financial markets have been dominated by speculation that the Bank of England may need to increase rates by as much as one percentage point to 3.25% to steady the falling pound, less than a week after a rate rise to 2.25% and before its next scheduled meeting in November.


Experts have warned the pound’s plunge towards parity with the dollar will send the cost of goods soaring even higher, potentially worsening the cost-of-living crisis, while it also means it will be more expensive for the Government to borrow money.

Neither Chancellor Kwasi Kwarteng nor Prime Minister Liz Truss are currently expected to publicly address the major market shift, with the Prime Minister’s official spokesman telling reporters on Monday that Downing Street would not be commenting on market fluctuations.

Their zeal for increasing rates may be tempered by their recollection of the increase to 15% which was made, then cancelled, on 16 September 1992 and resulted in the UK leaving the European Exchange Rate Mechanism (ERM).

 

[Bletchleyite]

I would be incredibly surprised if it ended up at 15%, but somewhere between 4 and 6% is a more normal level and it probably should go back there eventually.

 

[jfollows]

I would be incredibly surprised if it ended up at 15%, but somewhere between 4 and 6% is a more normal level and it probably should go back there eventually.

Agrred; 6% in 2023 seems to be the “market expectation” today.

 

[66701GBRF]

No emergency increase according to BOE.

 

[Nicholas Lewis]

No emergency increase according to BOE.

Kwarteng has twice weekly meetings with Bailey to keep him on a tight leash. If there was an emergency rise Kwarteng credibility would be trashed and he would have to go or BoE would lose their independence Bailey knows that so will pay along as he and his like aren't the ones that will suffer.

 

[Bletchleyite]

I wonder if they're letting the fallout from the short-selling frenzy to settle first?

 

[Dai Corner]

Virgin Money and Halifax have temporarily wirhdrawn some of their mortgage products.

 

[Bletchleyite]

Virgin Money and Halifax have temporarily wirhdrawn some of their mortgage products.

This always happens when there's rate uncertainty. They'll be reinstated once it's clear what is going to happen.

 

[jfollows]

Response from Treasury and Bank of England "too little, too late" according to some.
We'll probably see tomorrow whether or not the pound continues to "fall" according to their predictions or whether things stabilise overnight, although markets remain open around the world of course.
Rishi Sunak is probably working up a good line in "I told you so" speeches, probably not for tomorrow of course.

 

[brad465]

Response from Treasury and Bank of England "too little, too late" according to some.
We'll probably see tomorrow whether or not the pound continues to "fall" according to their predictions or whether things stabilise overnight, although markets remain open around the world of course.
Rishi Sunak is probably working up a good line in "I told you so" speeches, probably not for tomorrow of course.

Sunak and Johnson will certainly be laughing to themselves right now, Sunak even suggested during the leadership campaign Truss' pledges would short the pound, which his supporters are apparently circulating.