Inflation and your clients

Higher inflation should mean higher interest rates so, after a decade of low rates, savers should be in for good news. If you choose to keep your money in cash, I would expect several more interest rates rises, totalling about 1.5%, before the Spring. Investors are in for a rocky ride over the next 12 months. They have already experienced a lot of volatility. Markets are forward-looking, so will have already priced in the coming recession and the expectations of interest rate rises. However, if the recession is worse than expected there could be further falls. I would remind investors that these types of investments are long term, and returns tend to better cash over most five-year periods so you shouldn't look at a one-year return in isolation. If you have a mortgage, or are looking to borrow some money, my advice would be to lock in your rate now. If you prefer certainty, lock in for a long period as interest rates are still historically low, despite them increasing. A word of caution though; when inflation falls back to normal levels, in six months time, and the recession is in full swing, the Bank of England will be forced to cut interest rates. We just don't know by how much yet.

Despite the recent rate rises, because of higher inflation, savers are arguably in a worse position than they were a couple of years ago. This is because 'real' savings rates are even lower. That said, the higher rates do at least make shopping around worthwhile. Previously, when rates were at their lowest, you might only be missing out on 1% per annum by sticking with your current bank. However, now you could be missing out on up to 3.5% a year by not moving your account. For investors, it's generally a case of sitting tight. However, they might want to check their exposure to the long-term debt markets, as these are likely to be the most affected by higher inflation and rising interest rates. Meanwhile, borrowers might want to look at locking into longer-term rates to protect them from rising rates. Also, we might be returning to the days of the 70s and 80s when house buyers were encouraged to borrow the maximum they could. This was because high wage rises and high inflation would erode the value of that debt, and the mortgage payments, incredibly quickly.

Savers are not really seeing the benefit of increased interest rates filter through yet but savvy rate hunters will find some providers offering higher than average rates. Investors may need to review their holdings to ensure they continue meet their objectives and risk profile. Now that the economy and wider markets appear to be entering a new cycle, there could be shifts in growth and/or income opportunities. Borrowers will be the worst hit. While savers can choose to save, and investors can choose to invest, many borrowers have less of a choice about holding debt. Everyone should be going through a budget sheet exercise to make sure they are aware of their income and outgoings and can make the necessary adjustments. Those with revolving debt such as credit cards and overdrafts, which are more susceptible to rises in costs, may want to consider reducing exposure in this area, if possible.