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On Thursday 22 September 2022, just prior to the Chancellor’s publication of the new Mini-Budget, the Bank of England (BoE) announced that it woul raise the base rate from 1.75% to 2.25%. Yet the story is not over, with markets now widely expecting further rises in the coming months to try and stop soaring inflation and prevent further drops in the value of the pound (GBP). The picture is rapidly changing and a day barely seems to go by without another dramatic shift in the UK economy. Below, our financial planners explain how interest rates (as they currently stand in early October 2022) may affect your financial plan going forwards. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Why is the Bank intervening so much in the economy?
The Bank of England (BoE) is legally independent of the government and is tasked with keeping UK inflation under control along with stabilising markets and ensuring a healthy flow of credit to the “real economy”. In 2022, the looming challenge we have all been facing is the rising cost of living, with inflation now standing at a 40-year high of 10.1%. Raising interest rates is the primary “lever” that the BoE has to try and “cool down” the economy and try to bring inflation back to its 2% target.
In the background to this, moreover, sterling (GBP) has been steadily falling over the past year. In January 2022, $1 USD equated to £1.35 GBP. Yet by 27th September 2022, in Asian markets $1 was trading at an all-time low of £1.0327. This means that it is now more expensive for UK customers to buy foreign goods, and your money will not stretch as far when travelling abroad and converting your GBP to local currency. Since a weaker currency makes goods more costly in the domestic economy, it risks pushing inflation even higher – putting further pressure on the BoE to raise interest rates even higher.
What does the rising interest rate mean for me?
Interest rates now sit at 2.25%, up from their all-time low of 0.10% in December 2021. Although this is still low in historic terms (the average was 7.15% from 1971 until 2022), homeowners have grown used to low interest rates in recent years and built much of their finances on the assumption that these will continue. Now that the landscape is shifting, lenders are getting nervous about handing out mortgages. Banks like Halifax, Virgin Money and Skipton have withdrawn products from the market until the picture becomes clearer about what the BoE is going to do with the base rate. Markets appear to be pricing in an eventual interest rate rise to 6% in early 2023, to try and stem inflation which could reach 13% by the end of the year.
If interest rates reach these levels, then it will put significant financial pressure on homeowners. On a 6% base rate, the average household refinancing on a 2-year fixed-rate mortgage in 2023 could see monthly repayments rise from £863 to £1,490. With the energy price cap also likely to rise in the coming months (up from £1,971 to £2,500 per year from 1st October under the “price cap guarantee”), it now seems very likely that many UK households – even higher income ones – are going to face difficult financial decisions in the months ahead.
What can I do?
Speak to a financial planner if you are at all concerned about how your wealth and monthly finances may be affected by the above. Those on a variable-rate mortgage could discuss the option of signing a fixed-rate soon (to try and “lock in” at current interest rates for two years or longer). Although interest rates could conceivably fall later in 2022-23, this seems increasingly unlikely with inflation rising as quickly as it is.
Whilst some argue that the new Mini-Budget and other measures (e.g. the Chancellor’s planned “mid-term” economic plan in November) could help avert this, the BoE has highlighted how global events – particularly Russia’s invasion of Ukraine – are primarily driving inflation here in the UK, particularly due to rising wholesale oil prices. These events, unfortunately, are outside the government’s control and are unlikely to end any time soon.
Your protection plan will be especially important in the months ahead. Be careful not to simply dispose of policies such as life insurance, income protection and/or critical illness cover in an attempt to save on monthly costs. Times of economic hardship and uncertainty are when these are often particularly needed. Your financial planner can help examine your protection plan to ensure it still meets your needs at an appropriate cost.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk