What The Bank of England's May Announcement Means For Your Money

Posted by Simon Moore on May 22
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The Bank of England meet throughout the year to set British interest rates. Interest rates can act like an accelerator or brake for the economy.

Higher interest rates can slow the economy and lower rates can speed things up. This happens because if it costs less to borrow, because of lower interest rates, then consumers and businesses are more likely to borrow to fund things that help grow the economy . For example, a new factory or more spending. It might seem good to have low interest rates all the time, so the economy grows as fast as it can. However, in practice that can lead to the economy growing faster than is sustainable, and growth slowing even though rates are low. Basically, setting interest rates for the British economy is complicated.

For the past decade, since the last recession, British interest rates have been very low. This has helped the British economy recover from the last recession in 2008, which was unusually bad. The Bank of England is starting to gradually raise interest rates back to a more normal level.

May Interest Rate Decision

However, in the Bank's May meeting the decision was to leave interest rates at 0.5%. This is because the British economy hit a slow patch in the first few months of 2018. This was possibly due to bad weather or maybe because the data has been estimated and that estimate may change as more data comes in.

So the Bank still expects, based on what they are currently seeing, to raise interest rates gradually over the next few years, but because the data so far in 2018 has been softer than many thought, they plan to delay any increase for now. Of course, their plans may change depending on how the economy performs in the coming months and years.

Portfolio Impact

Rising interest rates, can be a drag on the performance of shares and bonds. So a delay in rising interest rates is potentially a positive for the markets. However, on the other hand, if the delay is due to a weak economy, then that can be a negative for the stock market. This is because the stock market generally benefits from an economy that's growing well.

Another, thing to bear in mind is that at Moola portfolios are invested in many countries globally. So even though the UK is part of a Moola portfolio, events in the UK are less significant for overall Moola portfolio performance than you might expect.

 

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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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