U.K. Hikes Interest Rates: ETFs In Focus

Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5%, reversing the August rate hike immediately after Brexit, as widely expected by economists. Despite relatively weak growth and uncertain terms of Britain’s deal with the EU on Brexit, the central bank hiked the interest rate for the first time since July 2007 in order to curb inflation.

U.K. consumer price index increased 3.0% year over year in September compared with 2.9% in August, per data released by the Office for National Statistics. Wages in the United Kingdom are not increasing as fast as inflation. It grew 2.1% in the three months to August, as a result of which consumers are witnessing a rise in costs in real terms (read: U.K. Inflation on the Rise: ETFs in Focus).

The British economy has been suffering since the Brexit referendum as a falling sterling has made imports costlier and added to consumers’ woes. The recent increase in inflation therefore created pressure on the BOE to hike rates.

What Lies Ahead?

In the third quarter, U.K.’s GDP grew 0.4% sequentially and 1.5% year over year. Although this reflects a slight increase from 0.3% sequential growth in the second quarter, the rate of improvement has been dismal since Brexit and is lagging the overall Eurozone.

Moreover, a rate hike will impact innumerable mortgage holders and might harm economic activity, thereby leading to a further decline in the GDP. Per a Guardian article, citing accountancy firm Moore Stephens data, households are expected to incur an additional 1.8 billion pounds on variable rate mortgage payments in the first year itself. Adding to the agony, households are expected to incur an additional 465 million pounds on credit card payments, overdrafts, personal loans and car loans.

However, savers will witness a slight increase in their returns. Moreover, pensioners are expected to benefit from the decision as well, as they will see their interest income on savings getting a modest boost.