It is important that we keep the issue high on any adviser/client agenda as there are underlying issues that could cause rates to rise and arguments that it should already be nudged upwards. There are a number of indicators as to where and when the money men feel we are moving. Swap rates have increased while three-month Libor has remained fairly stable at just over 1 per cent. However,m both six and 12-month Libor are building in rate rises.
This leads to the unanswerable question, but one every client expects you to know the answer to, when will bank rate begin to rise?
There are potentially four scenarios when it could be argued a rise is due and each has its pros and cons. Why would you not raise rates next month? The Government wants us to save but where is the incentive for this? There are some decent rates if you are happy to tie your money up but most people want a bit more flexibility to their savings due to the continued economic and employment uncertainty. With most instant access rates, you may get a better return betting on every horse in the 2.10 at Sandown.
Raising interest rates now may go a small step in getting people to save. It may also energise the increasing number of borrowers sitting on lenders’ SVRs to consider their next move. One rate change will not get the remortgage market moving but it will start the thought process off. Against this argument, do we know the real outcome of quantitative easing? The Bank of England has currently called a halt to it but Sept- ember may see the presses rolling again.
The money markets are factoring in potentially October or November for a rate rise. Do we really think that this will happen and jeopardise the Christmas retail splurge and the knock-on effect that sales starting in November and not January may have on the wider economy? Can we though afford to hold off and risk inflationary pressures growing too quickly? The BoE was criticised for holding rates too high for too long in 2007/08, could the reverse now happen?
Logically, it may follow that they wait until the New Year and start in February or March. This puts us very much into general election territory and accusations of political interference. Can we really wait until June 2010 before rates rise? Do we really have to stagnate until then? These are tricky times ahead for the BoE in walking a very unsteady tightrope.
For an adviser, add to this the plethora of White Papers that are being issued on the RDR, the future of banks and, in September, the mortgage market roadmap, no wonder times are very testing.
We must, however, not take our eye off the day-to-day issues of giving the client the best advice possible with the facts we have available with the experience built up over the last few years.
Martin Reynolds is development director of PMS