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From Independent Women

26th July 2023


Economy & Investments

Feeling the heat - interest rate challenges

The Bank of England recently announced another interest rate rise, in response to persistently high inflation levels.  The jump of another 0.5% means that the base rate now sits at 5.  Primarily, this is because the economy is still just too hot – despite a comprehensively higher cost of living, consumer spending is still high, with correspondingly high levels of money circulating in the economy. 

Looking for the good in interest rate rises

Interest rate rises can bring both good or bad news, depending on your point of view. For private investors or businesses using credit, the added costs can be expensive and worrying; but for savers, it can be a welcome boost to funds.

As ever with growth rates, we look at the corresponding relationship with inflation. In other words, any interest rate needs to be higher than the rate of inflation, to avoid a nil effect. If, for example, I have £100,000 earning 6% net after fees, I have in effect £106,000 this year. But if inflation sits at 9% (as it has for most of this year), the buying power of that £106,000 is actually more like £96,460. So a growth rate needs to be at least 9.5% (not accounting for any fees) before I’ll be ahead. The nature of investing means that both growth and inflation rates will likely swing year after year, but over the longer term, the trend to aim for is growth which exceeds inflation overall.

At this time of interest rate rises and high inflation, we continue to seek suitable funds and investment opportunities for our clients. Gilts have not been popular over the past 10 years due to comparatively low returns, but with the base interest rate now at 5%, and the tax efficiency offered (gilts are exempt from capital gains tax on sale or maturity), we’re seeing interest in gilts re-emerge for investment portfolios and direct investments. For clients unsure what to do with cash savings, or seeking security, gilts could now be an option to consider. As always, this should be balanced within a diverse portfolio and knowing your attitude to risk, so it’s one factor amongst many, but is a good point for highlighting the continual evolution in investment options. We should not be fearful of news headlines and negative press; information and good advice are key.

The art of investing is knowing the right course of action amidst ever-changing conditions, recognising opportunities, and responding quickly. This is where our experience and services can be invaluable, as when economic conditions start to shift, we are continually looking for opportunities to take the place of what has worked and gone before.

To talk about your cash savings and the options available, please don't hesitate to contact us.
We'd be delighted to speak with you and help to find an option that's right for you.

For a comprehensive view of the economy and investments, see our Mazars quarterly economic outlook, or register for our next economy and investments webinar.

Content on this page is provided for general information and is subject to change and does not constitute advice.
If you would like to know more for your own situation, please do not hesitate to contact us.
We would be delighted to discuss this with you in more detail, taking your circumstances into account.