As many of our clients will be aware, one of the great worries as the world recovers from the pandemic is inflation. Late last year the Bank of England suggested that inflation ‘might reach’ 5% in 2022. A week later the figures for November came out showing that inflation had already reached 5.1%.
The UK is not alone. In Germany, inflation reached 5.2%, the highest figures since 1992, while in the US it hit 6.8% – a level not seen for 40 years.
Traditionally, one of the principal tools used to counter inflation is interest rates – and in December the Bank of England responded to the inflationary pressure by raising rates to 0.25%.
It is, though, a delicate balancing act – at roughly the same time as the Bank was raising rates, figures were released showing that the UK economy had grown by just 0.1% in October last year, with growth for the third quarter of the year revised down to 1.1% from the previous figure of 1.3%.
With supply chain problems continuing, economic recovery from the pandemic is going to be unpredictable and difficult – and it will not be helped by rising interest rates. But neither will it be helped by rising inflation, which also erodes the real value of clients’ savings.
So, what will happen to interest rates in the next 12 months? Some pundits are forecasting that inflation in the UK could well reach 6% before it starts to stabilise, so we may see gradual rate rises through the coming year – after all, December’s rise was the first time rates have risen in over three years.
This approach is likely to be mirrored elsewhere: in the US, for example, the consensus now seems to be that there will be two or three increases in interest rates next year, as the Federal Reserve looks to keep inflation under control.
The question is whether those increases in interest rates will be reflected in better rates for savers?
The more sceptical among our clients will expect a repeat of what nearly always seems to happen. Mortgage rates rising almost immediately: rates on savings rising slowly, if at all.
It is important, therefore, that clients keep a sharp eye on their savings, and on the interest rates, they are receiving. Inflation of 6% set against an interest rate of say, 0.25% (or lower, in many cases) will very quickly erode the value of savings held on deposit.
As part of our regular review process, we make sure to check the savings rates our clients are receiving. Our advisors are always available if you need any assistance or advice on savings rates or any other aspect of your financial planning.