Unlucky number 13…

The bank of England has raised the base rate, for the 13th consecutive time, from 4.5% to 5%, to try and combat the current eye watering inflation rate of 8.7%.
But what does this mean for your money?

Mortgages

The majority of UK households (8 out of 10) are currently on fixed rate deals, meaning they won’t see an immediate increase in their monthly payments. However, with fix terms due to end, they would see a big jump in price when they look to obtain a new deal, with the current mortgage rate offers at around 5-6%, which is a huge difference when compared to the historic deals of 2.29% in November 2021 – not so long ago!

Cash

However, it’s not all doom and gloom. With ever increasing interest rates, the opportunity for savers to claw back some of the pennies that are being spent elsewhere does arise. The best easy access accounts on the market currently offering c.4% and some longer fixed term accounts being able to offer c.5.5%. That means a £500,000 account could look to earn between £20,000 and £27,500 annually.

Of course, with inflation remaining steadily close to 9%, your money will be losing purchasing power. There are other options that have the potential to provide inflation plus returns but naturally you will be taking more risk than cash deposits.

Investments

Rising yields across all asset classes has led capital values to fall in some high income producing assets such as corporate bonds, property and infrastructure investments. For those looking for income these could be interesting areas to invest but they are complicated assets classes and so specialist knowledge is required. For example, you need to understand if your income is inflation linked or not and the types of assets you are investing into and underlying contracts that generate the income.

The best long term hedge for inflation should be investing into the equity of high quality companies as you have the potential to benefit from capital growth, via long term share price growth, and importantly an increasing level of income as profits and dividends increase over time. Companies also have the potential to pass on price rises (inflation) to customers but only if they have products of high enough quality!

Summary

The 0.5% rise was a shock to the market given widely held expectations of a 0.25% rise. So far markets have taken this as UK negative and in particularly increasing the potential for a UK recession hitting domestic UK equities. It was slightly surprising that Sterling was down versus the US Dollar yesterday, but this is the currency market pricing in a higher probability of a recession in the UK.

Volatility is likely to continue in the short term and we are here to discuss any of the above issues in more detail if you are interested.

Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk.