The BoE will have to hike interest rates 14 times before cash beats shares
What a lot of fuss about next to nothing. The Bank of England's decision to hike interest rates for the first time in a decade sounds like a big deal but it isn't really. Financial analysts and commentators feel obliged to mark the occasion, only to find there is very little to say. The move has great symbolism, but little practical consequences. In fact, practically none at all.
So much fuss about a little 0.25% rise. After Thursday's increase, base rates now stand at a meagre 0.5%. Exactly where they stood all the way from March 2009 to August 2016. This will add around £18 to the monthly repayment on the average standard variable rate mortgage. It will give someone with £10,000 in a savings account an extra £25 a year, assuming their provider passes on the rate increase. That's right, £25.
This would be fine if it was the start of a long process of returning rates to something approaching normal, but it isn't. The BoE's rate-setting monetary policy committee warned that any future increases would be "at a gradual pace and to a limited extent". Markets are looking at just two more rates hikes in the next three years. We may not even get that. Rather than the start of the process of normalising rates, it looks more like the end.
People used to say that cash is king but it was dethroned almost a decade ago and yesterday's move will do nothing to restore its sovereignty. Before the move, the average savings account was paying just 0.37%. Even if every bank passed on yesterday's rate hike, the average account would pay just 0.62%. The restoration will have to wait.
Cash has been usurped by shares, and I see no reason for that to change. The FTSE 100 is currently yielding on average 3.92% a year. For base rate to top that level, the BoE would have to repeat yesterday's move another 14 times. That is what it would take to lift base rates to 4%. Can you see that happening? If savers are lucky, rates could hit 1% by 2020.
Most of us will need at least some money in cash, ideally in an easy access savings account for a rainy day. Others are averse to stock-market volatility and if you are investing for less than five years, you should avoid equities as you may not have enough time to rebound from a correction. However, anybody investing for a longer period should find they get a far superior return from stocks and shares.
While the FTSE 100 currently yields on average 3.92% a year some companies pay a lot more than that, for example, oil giants BP and Royal Dutch Shell look strong buys as they currently pay income of around 6% a year, and their share prices are rebounding too. Plenty more FTSE 100 stocks yield more than 5%. Plus you also get capital growth when share prices rise, although you must also take short-term volatility into account.
Given the expected glacial pace of anticipated base rate hikes, yesterday's move only confirmed that shares will continue to destroy cash for years to come.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.