The Bank of England’s Monetary Policy Committee has revealed it has increased interest rates to 0.5 per cent, up from 0.25 per cent.

It is the first rate rise in a decade, having last raised interest rates in July 2007. The MPC voted by a majority, seven to two, to raise the rate. On inflation, the MPC said it still expects it to peak about 3 per cent in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The decision to increase interest rates will bring a “modest boost for pensions” according to Royal London director of policy Steve Webb, who said it should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.

However, he warned not to get carried away: “Assuming that the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.

“The one group who may be concerned by today’s news are those planning to take a transfer from a final salary pension. Transfer values are likely to track down as interest rates rise. Anyone considering a transfer may wish to take impartial advice on the pros and cons of a transfer as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels.”

BlackRock director of client solutions Vivek Paul shares the view that the rate rise is a “timely boost” for pension schemes, but reiterated that schemes should not get carried away as we are not about to return to historic yield levels.

“When the Bank signalled a potential interest rate rise in September, we saw a repricing in the UK government bond market; 20-year real and nominal yields both rose by over 25bps, pushing pension scheme liability values lower and funding levels higher. However, this only takes yields back to where they were prior to the Brexit vote last year.”

Paul said that September‘s signposting, which came as a surprise to many, was consistent with BlackRock’s view that UK interest rates will be higher than the market is expecting in around five years’ time.

“Earlier this summer, we suggested pension funds consider modestly lowering their target hedge ratios in line with this, to benefit more from the anticipated upside to funding levels with rates rising. This is because we saw less downside risk to UK real rates than we saw in the immediate aftermath of the Brexit vote last year, not least due to international factors such as a firmer footing to global growth,” he said.

However, one expert has warned that the rate rise may not be the “silver lining for pension funds that some predict”. Hymans Robertson chief investment officer Andy Green said nominal gilt yields and the real yield on index-linked gilts are little changed from their levels at the beginning of the year.

“Many of the longer term issues facing the UK such as Brexit and a sluggish housing market look set to remain well into 2018 and this move has already been well-flagged in the market. In this ongoing environment of low yields and uncertainty we continue to recommend a focus on assets that can deliver predictable returns with attractive levels of income to deal with pension fund outflows.”

Not surprisingly, the rate rise is also good news for savers, as noted by Green. “Given the last decade of increasingly lower interest rates, today’s Bank of England announcement will be extremely welcome news for savers and may bring slightly more pressure for borrowers,” he said.

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