Last month, the UK’s inflation figures for March were released. Having been 6.2 per cent in February, inflation had risen to seven per cent, the highest rate for 30 years.
Across the Atlantic, the figures were even worse, as US inflation reached 8.5 per cent, the highest since March 1981, as the Ukraine war pushed up energy prices. In the US, it is almost certain that the Federal Reserve will increase interest rates by 0.5 per cent this month, and a report from bankers JP Morgan suggested that, rates here in the UK could rise a further four times this year.
In his Spring Statement delivered on March 23rd, Chancellor Rishi Sunak said he expected inflation to average 7.4 per cent this year, but at the time, no-one was really expecting the war in Ukraine to last into next year, as many military experts are now predicting. As many of our clients will have read, the war, along with the continuing problems in the global supply chain, will push up the price of fuel and food.
Traditionally, the Bank of England has used interest rates to control inflation. At the moment, the bank base rate is one per cent, and if JP Morgan’s prediction is accurate, we could well see base rates in the region of 1.75 per cent to 2 per cent by the end of the year. Some forecasters are even suggesting that inflation could rise above ten per cent in 2022.
Will a rate rise be enough to curb inflation? Higher interest rates will certainly mean higher mortgage rates, and more interest to pay on credit cards should start to curb inflation.
However, the war in Ukraine, traditionally known as the bread basket of Europe, presents a once in a generation set of circumstances, as Russian forces continue to blockade ports and prevent grain exports.
The World Bank has spoken of a human catastrophe, forecasting a thirty-seven per cent jump in food prices this year.
Whether we see three, four or five interest rate rises may be immaterial as far as inflation is concerned. People will unquestionably have less money to spend, but they have to buy food, and the energy price cap is set to rise again in October, adding another twist to the inflationary spiral.
For clients who are savers, rising interest rates should be good news, although it is likely that rates paid on savings accounts will remain historically low. Although the vast majority of world stock markets fell in April, the UK’s FTSE-100 index proved resilient, registering a small gain of twenty-nine points. Again, a prolonged period of inflation will put pressure on company profits.
We fully appreciate that some clients may be worried at the moment. As we have already written, these are unprecedented times. If you have any questions on how world events and/or the Bank’s latest decision on interest rates will affect your savings and investments, please do not hesitate to contact us.
