What Impact Will Forward Guidance Have on You?

Forward Interest Rate Guidance: the impact on savers, investors, mortgages, currency, pensions and annuities

Hargreaves Lansdown 7 August, 2013 | 12:45AM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Danny Cox, Head of Financial Planning at Hargreaves Lansdown explains what effect Mark Carney's new interest rate promise will have on you. 

Forward guidance was widely anticipated and provides some greater certainty - a positive move from the Bank which could help the economy reach ‘escape velocity’ – a virtuous circle where more spending means more jobs, which increases spending further. However, the alternative of simply stating that interest rates would remain low for a specific timeframe could arguably have provided even greater certainty and therefore had an even more positive effect. 

It’s important for savers and investors to focus on their long term goals and ignore the short term reactions that are likely to accompany today’s announcement.


Those most negatively affected by Mark Carney’s proactive stance will be savers. The bank will likely tolerate above-target inflation over the next few years, meaning real interest rates will remain negative.

Interest rates on cash deposits aren’t going to rise anytime soon and certainly not significantly for three years it seems. That said, the Funding for Lending Scheme, which has depressed interest rates further, is due to end next year so there may be a little improvement then, unless it’s extended. Savers should shop around to ensure they are getting the best deal and use Cash ISA to shelter their savings from tax. 

Interest rates remain below the rate of price inflation so savers should not hold too much cash and consider looking to the stock market or bond markets for yield, if they can stomach the risk.


The five-year gilt yield has increased a little this morning but markets seem relatively unexcited by the news, suggesting this is broadly in line with expectations. We might see inflation expectations rise on the back of this news and bond yields may also increase moderately too, with an associated price fall. It seems unlikely at the moment we will see more QE in the UK in the short term however Carney is keeping this option open.

Stock markets abhor both uncertainty and rising interest rates. This announcement should therefore be doubly positive for markets over the medium term – an improving economy plus the assurance that interest rates will remain low could be a very good environment for share prices.


Lower for longer interest rates and an easing of bank’s currently strict lending criteria will improve the mortgage market and we could see already ultra-low mortgage deals improve further.


The news initially sent sterling into a tailspin, falling almost a cent versus the euro and US dollar, although these losses have soon more than reversed. The BoE is keen to stress that a 7% unemployment threshold does not mean it will tolerate higher inflation in order to achieve it, boosting sentiment towards the pound.

At the time of writing, the exchange rates stand at:

                                                Interbank rate                   % daily change

Sterling / Euro                                   1.1622                         +0.75%

Sterling / US dollar                          1.5450                          +0.66%


Those investing into pensions should benefit from more stable and, hopefully, rising stock markets. Pensions are a long term investment and in most cases investors should keep saving regardless of short term news.


Forward guidance will bring clarity to annuity rates which have been subject to questions over rises for some months. We now know annuity rate rises are unlikely for 3 years.

For those with a small pension pot or who need certainty, it now makes sense to get on with buying an annuity; for those with larger pension pots or who can tolerate some investment risk, it makes sense to park the idea of buying an annuity for a few years and look to income drawdown instead.

Given the three knock out conditions, we still don't have absolute certainty; we never will, but it is now clear in what direction the weight of expectations should be focused.

They should ensure they both shop around to get the best deal, and also check whether they qualify for a lifestyle or ill health enhancement. This could boost their annuity income by as much as 40%. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Hargreaves Lansdown  Hargreaves Lansdown is a financial services company based in Bristol that sells funds and shares and related products via its website and through the post to retail investors in the United Kingdom.

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