02 February 2023
If you are covering the Bank of England’s interest rate decision, please see the following comment from Rio Stedford, financial planning expert at Quilter:
"While the peak of inflation has hopefully passed and interest rate rises from the Bank of England may be set to slow after today, the dual impact of high inflation and rising interest rates are having a devastating impact on everyone's personal finances. Understanding how these two economic forces impact your finances can help you make informed decisions to mitigate their damaging impact.
"Here are some of the ways that high inflation and high interest rates impact different areas of personal finance:
Mortgages and other debt:
"With inflation remaining in the double digits, people's buying power continues to be squeezed, meaning it might be more difficult to keep up with regular living expenses and still have money left over for mortgage payments or paying off other debts.
"To make matters worse, in a bid to tame inflation, interest rates are now the highest they have been for decades, making borrowing money more expensive. This can make it more difficult for individuals to obtain a mortgage or for existing homeowners to refinance their mortgage, especially if they haven't fixed for a long period of time. The higher interest payments will also make it much more expensive to borrow money.
Savings:
"High inflation can erode the value of savings over time in real terms, while higher interest rates help to grow your savings at a greater rate. However, if for example inflation is 10% but your bank is only paying a savings interest rate of 5%, then you are essentially losing 5% of your money. This can make it more difficult to meet financial goals, such as buying a home or saving for retirement.
"To combat the effects of inflation, individuals may need to save more or invest their money in financial vehicles that provide a higher return. Although the stock market has had a difficult year, historically, investing has provided inflation-beating returns over the long term.
Pensions:
"While many pensioners don't have much debt to speak of as they typically own their house outright, high inflation means that their regular pension payments may not cover their living expenses as they did before. Although the state pension has increased in line with inflation, some pension plans may not keep pace with inflation, reducing the value of benefits over time. This can result in a lower standard of living and increased financial stress.
"If someone holds a significant amount of cash in their pension, then the interest rate hikes will help produce higher levels of growth, but the rates will not beat inflation. For workers still contributing to their pension, high interest rates can also make it more expensive for businesses to borrow money, which can result in less economic growth, lower profits, and reduced contributions to pension plans.
Investing:
"Due to the cost-of-living crisis, people may have less each month to put into investing via products such as stocks and shares ISAs. Reducing the amount you put into savings vehicles like pensions or ISAs can have a significant impact on how much you end up with, particularly over a long period of time due to the impact of compound interest. It is worthwhile to try to maintain regular savings into investments if possible.
"Making sure your investments suit your risk appetite is key. Some people may try to combat the effects of inflation by investing in riskier assets that might have a higher potential upside, but could also end up being loss-making. Especially in these economic conditions, it is important for people to carefully consider their financial goals and risk tolerance before making any investment decisions. However, it's worth remembering that although bonds are often seen as lower-risk investments, due to high interest rates, bonds have made significant losses this year. Doing your research or getting financial advice can be crucial to ensure you get the best possible outcome."
