Money Matters

with Roger Downes of Andorran

Interest rates

It’s difficult to have a conversation about financial matters at the moment without the subjects of inflation and interest rates being high on the agenda. The two are linked, of course, with interest rates used by government in an attempt to control inflation.

With inflation rampant at a rate we haven’t seen for a generation or more, it’s a certainty that we are going to see interest rates pushed up in an attempt to slow inflation.The argument, in a nutshell, is that people spend less when interest rates are higher and spending less will control the increase in inflation. It has a proven track record, so don’t expect there to be a u-turn any time soon.

To be fair, interest rates reached an unsustainably low base of 0.1% at the start of the covid pandemic.They were always due to rise at some point and there are many ‘experts’ who think that we should have suffered much more rapid hikes than the gentle monthly increases that have seen the Bank of England base rate reach 1.75%. Base rate will peak between 3 and 5%

It won’t stop there – expect base rate to peak at somewhere between 3 and 5% by the end of this year and remain there for what will seem an age after that – another twelve months at least and maybe more.

These are levels that we haven’t seen for approaching 20 years, meaning that the newest generation of businessmen and women have never had to run their companies with interest costs at this level. Individuals with mortgages will no doubt have not considered whether their borrowings were affordable at these rates of interest.

Doubtless the banks won’t increase what they pay on savings as quickly as they do what they charge on borrowings. But that’s ‘par for the course’ in terms of their behaviour.

There are challenging times ahead, but if it helps us to win the battle against inflation, it will have been worthwhile.

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