Low interest rates and rising inflation: what does it mean for your money?
As the value of the pound has fallen sharply, this makes imports more expensive and raises the chance of inflation rising.
Usually when inflation rises the central bank would look to increase interest rates. However as the market is pricing in a 78% chance of interest rates being cut as early as next week, it seems the opposite will play out.
So we’ll be in an environment of low interest rates and rising inflation – what does this mean for savers, investors and property owners?
Danny Cox, chartered financial planner at Hargreaves Lansdown, said low rates means the economy is growing too slowly which isn’t healthy although there are some short term winners.
“Borrowers should rejoice with mortgage and credit costs going down. Those benefiting should take the opportunity to put aside some of the money they are saving for their future, or pay down some of the borrowings, or preferably both.”
Cox added there will come a point where people should fix their mortgage rate. “Borrowers should not hang on to the last minute but should secure the lowest longest rate they can to give themselves security,” he said.
Cox said that Cash ISA and savings rates are very likely to fall further and so savers should shop around to improve the rates on their products.
“It’s important to hold some cash, but not too much and take a longer term view with the balance. Equities are the place to be as property, fixed interest and cash are all facing challenges.
“The market it saying we won’t see an interest rate rise for five years but they have been consistently wrong. We just don’t know and the best place to invest for the long term will be equities since dividends at around 4% are way in excess of cash and the capital growth will come through eventually.”
Maike Currie, investment director for personal investing at Fidelity International, said that while inflation has picked up slightly, we remain far from the Bank of England’s 2% target.
“It’s worth noting that the headline inflation rate tells only half the story. On the surface it may look like the cost of living has barely increased over the last year, but dig deeper and there is a clear generational divide when it comes to the cost of living,” she said.
Fidelity research revealed that the current rate of increase in the cost of living is three times more for the millennial generation, with those under 30 spending a greater proportion of their income on areas which have suffered the highest price increases – education and housing.
Therefore, in the 12 months from March 2015 to March 2016, under 30s suffered a real inflation rate of 0.9%, compared with 0.4% for both the Gen X (30 – 49-years-old) and Baby Boomer (50 – 64 years old) generation, and 0.3% for those over 65.
Rising inflation is likely to see this group hit harder and consequently, millennials will be left with very little to save and the challenge of generating higher returns to keep up with the pace of inflation.
Currie said: “Given the uncertain backdrop and the prospect of lower returns, mindless investing will not cut it. The FTSE 100 is still below its 1999 peak – which means parking your money in a passive fund tracking Britain’s blue chip index, would have left you with disappointing returns. It’s important to seek out the winners and steer clear of the losers – this is where a good active manager can help.
“Good stock selection coupled with the power of compounding by reinvesting dividends is the only way to ensure solid returns in a low-return world.”