MONDAY, MARCH 06TH, 2023

The end of cheap money?

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Peter Blant Financial AdvisorInterest rates, cost of living, gas and oil prices… Right now, the news is awash with stories about the challenges we’re all facing in managing our money. And you’d have to have been living under a rock to have missed statements about this being the ‘end of cheap money’. But what does that even mean? Is it really true? And most importantly, how does this affect you and your family’s finances? To answer these questions, you need to go back to 2008…

The financial crash

Back in 2008, the Bank of England started one of its biggest programmes of fiscal stimulus in recent economic times through quantitative easing, a monetary policy where central banks boost economic activity.

The exercise essentially introduced new money into the economy to provide support to the troubled banking system in the wake of the crash and has, over the last 11+ years, had the effect of creating artificially low interest rates and inflation.

Central banks have also spent the last decade or so working to restore trust in banking practices through the creation of much stricter rules around security and liquidity delivering a series of reforms aimed at ensuring European and UK banking systems are much more resilient.

The end of quantitative easing

But all things must end and in 2021, just as energy costs were starting to spiral, the programme came to an end. This was in part because of the massive amount of financial support our government provided during the global pandemic, through bounce-back loans, furlough payments and much more.

Without this constant supply of new money and in a perfect storm that included a goods and material shortage caused by the pandemic, the war in Ukraine and the rising cost of oil and gas, inflation hit double figures in 2022. As early as January 2022, the Bank of England predicted a peak of 4% but, while the actual rate is up for debate as these figures can be manipulated, the Consumer Price Index (CPI) showed UK inflation actually hit 10.5% by December 2022, in the wake of its 11.1% peak a couple of months earlier.

The primary approach to put the brakes on soaring inflation is to increase interest rates, making all borrowing more expensive, and ensuring we’re all that bit more reluctant to splash the cash when it comes to discretionary purchases like holidays and new cars.

Throughout 2022 all lenders increased mortgage rates, causing stress for buyers and sellers alike and resulting in a previously sizzling property market slowing considerably, with new mortgage approvals dropping month on month throughout the year.

A significant impact is also being felt by borrowers coming to the end of their existing deals, set back when rates were much lower, who have been and are facing a sting in their household expenses since mortgages on offer today are significantly more expensive.

Sub 0.5% interest rates are over

Circling back around to my original question, “Is it the end of cheap money” and the answer is of course, yes, but that’s not the whole story.

The days of historically low sub-0.50% bank rates are behind us, with the Bank of England base rate jumping from 0.10% in January 2022 all the way up to 4.00% at the start of 2023. And we’re expecting to see the Bank of England increase rates to somewhere in the region of 4.50% by this Summer and hold them there until inflation beings to fall again. For many, these figures will feel like a huge crimp in their cash flow. But it’s worth bearing in mind that a base rate of 4.50% is still historically low – just ask anyone who was paying a mortgage in the 90s how a 15% interest rate felt!

A savings boost

Naturally, it’s savers who’ll benefit the most from rising interest rates, after being held hostage with low rates of return on deposit-based savings since 2009. Rates in excess of 4% for fixing into a 1- or 2-year product are now available on the high street and higher returns on cash deposits are great, but in real terms, inflation is still reducing the buying power of cash over the medium to longer term.

There’s a place for cash in everybody’s portfolio but keeping too much cash in a low-yielding environment guarantees your money is losing buying power. Here at Milestone Financial Planning, we work with clients to create bespoke plans to suit individual needs.

This starts with the provision of a suitable emergency fund and then we talk about how much money you’ll need in the future to fund luxuries alongside normal expenditure. Let us fill in the blanks and create a plan to help get your money working smarter and harder. By using your available tax allowances we’ll improve the tax efficiency of your funds and make sure you’re on track to meet your financial goals. Our skilled team monitor and review your plan, making amendments where necessary to take account of any changes or new opportunities which arise.

Over the last 2 years, the pace of change has been head-spinning. But the truth is, change creates new and exciting opportunities, so getting truly independent financial advice has never been more valuable when it comes to your family’s financial position.

Craig Croft-Rayner

Craig Croft-Rayner Craig is a Director and Financial Planner with 5 years of dedicated experience in the finance sector. Craig's commitment to excellence is evident as a proud member of the Chartered Insurance Institute and holds a diploma from the Personal Finance Society (PFS). He is currently undergoing training to achieve the esteemed Chartered Financial Planner status. Craig is passionate about empowering individuals to make informed financial decisions and achieve their financial goals.

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