What The Bank Of England's Rate Move Means For You

Posted by Simon Moore on November 20
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The Bank of England recently raised interest rates for the first time in 10 years. This may seem like a big deal, but we think it's actually less important than it appears.

First, let's explain what interest rates do. When you borrow money for a car, home or a student loan, the amount that you pay in interest (the cost of borrowing money), is related to the interest rates than the Bank of England sets.

Often a lot is added to the interest rate for the risk that you may not be able to pay the money that you borrow back. Yet, ultimately if interest rates set by the Bank of England go up the cost of interest on buying a car or a home is generally expected to go up too.

So, by raising interest rates, the bank is making it slightly more expensive to buy cars, houses etc. using borrowed money. This means people are a little bit less likely to make major purchases, and economic growth (in theory) slows a bit.

At the moment, the Bank has set rates very low for a very long time, so they aren't really trying to slow down the economy by raising interest rates, they are just removing some of the boost from extremely low interest rates that was added at around the time of the last recession, and has been in place for a very long time since.

Also, with the Brexit vote the Bank moved interest rates even lower, because of fears about the economy. The British economy appears to have held up ok since then, and therefore the Bank is removing the support they provided last year.

Now, the other impact of interest rates is with savings and investment portfolios. When interest rates go up, the price of bonds can decline slightly. In practice, the financial markets didn't move much after the Bank's recent announcement because the financial markets expected the move and appear to have reflected it in prices a while ago. So the impact of the Bank's move on portfolios containing bonds appears fairly minor at this point.

It's also important to remember that Moola portfolios are internationally diversified, so though the British press is understandably very concerned with what the Bank of England is doing, Moola portfolios can contain bonds from around the world. This means that it can just as important what's happening with interest rates in America or Germany as in the UK.

So the recent move by the Bank of England hasn't had a major impact on the markets because it was expected and Moola portfolios are internationally diversified. This means investments are spread across different countries. We believe this means that if something especially good or bad did happen in the UK, Moola portfolios may potentially see smoother returns because of their overseas exposure.

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Written by Simon Moore

He was previously CIO of FutureAdvisor, a US digital advisor. His most recent book Digital Wealth, explains automated investing. He studied economics at Oxford, and completed his MBA at the Kellogg School of Management.

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