Signals from Bank of England show benefit of tracking feature

Signals from Bank of England show benefit of tracking feature

Investors seeking higher income from fixed-term products are facing a surprise split among policymakers on the Bank of England’s Monetary Policy Committee.  Last week’s decision once again forces investors to plan for potential interest rates increases.

Sparked by concerns over rising inflation, the rate-setters voted by a 5-3 majority to keep interest rates at the current level.  Analysts had expected a 7-1 split but two more external committee members unexpectedly joined calls for an increase.  The last time three MPC members voted for rates to rise was as long ago as May 2011 when the committee had its usual nine members, writes REAL director Alan Bate.

Lock-in now and miss higher interest?

Our 9th February post addressed the concerns of investors who are worried about locking-in to fixed rates when the chances of base-rate increases appear to be rising.  REAL Income Bonds’ tracking feature provides a potential solution, paying regular income for two to five years at 3.5% per annum above base rate, subject to a minimum 0.5% base rate and a maximum 5% per annum base rate.

Now, while base rate is 0.25% the Income Bonds are paying 0.5% + 3.5% = 4% per annum.  If the Bank raises rates above 0.5%, interest payable to our existing and new Income Bond investors will keep pace.  For example if base rate rises to 1%, our investors will receive 1% + 3.5% = 4.5% per annum commencing the month following the base-rate change.

Investors choosing REAL Income Bonds therefore benefit from an attractive interest rate from the outset with ‘upside’ potential by linkage to future base rate movements.

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