12th August 2022

What an interest rate hike means for savers?-Claro Money

Sarah Brill, Financial Coach, Claro Money, comments:

Rising interest rates are caused by inflation, which happens when there’s increased spending and movement in the economy. Inflation is the rate at which prices for goods and services rise, in real terms leads to a decline in purchasing power over time.
The Bank of England has raised the interest rates from 1.25% to 1.75% - the largest hike in over 27 years. It says higher interest rates make borrowing more expensive and encourages saving. This in turn reduces how much people spend which pushes inflation down.

Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change, but criticism has begun after living costs have rocketed to a 40-year high of more than 9%.

So, what does this mean for savers?
One thing’s for sure, the future is uncertain. The best way to get more comfortable with uncertainty is to plan for it. Firstly, make sure you have an emergency fund-say three to six months’ outgoings-kept in an account that’s easily accessible and generates some interest. Generally, the recommendation is at least three months of expenses as an emergency fund, now more than ever it's important to be planning for the inevitable cost of living rises. For example, increased gas and electricity, food and petrol costs. If you're worried about maintaining your lifestyle or you're unsure how much emergency fund is enough, creating a budget will help you assess how much will help you maintain a comfortable standard of living over the next few months.
For longer term savings-of at least three years-you might want to consider investing. This is because the stock market tends to outperform cash in the long term. Investments benefit from compound interest and sometimes dividend payouts which can be reinvested. As with all investments, it's important to diversify and take appropriate levels of risk. If you already have investments, now might be a good time to look at your portfolio and rebalance it. Pound cost averaging refers to investing little and often, which can teach you a non-emotional approach to investing because you'll be investing no matter what state the market is in.
If you’ll need your money sooner, you could look at easy access savings accounts or fixed or variable rate cash ISAs with the best returns rate for your short-term goals.
There’s a real opportunity for savers to benefit from an interest rate hike if the increase is passed down from savings account providers to customers. Vote with your feet and consider moving your savings to a different account if the rates are more attractive. If not, you risk your money not keeping up with inflation and your savings declining in value.

And for borrowers
The interest rate rise is likely to hit two million borrowers with variable rate mortgages, meaning that earners are going to feel the impact of these rising rates as the cost of borrowing increases.

Today the average variable rate mortgage currently sits at 4.38%-almost 1% higher than the start of the year and there are few signs of slowing down."

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