How to survive the base rate rise

In the movie, The Day After Tomorrow, a massive climate shift means that the world starts to freeze. Survival for climatologist Jack Hall and his son, and humanity means that those living in the Northern Hemisphere have to head south to avoid freezing to death.

The mission was simple – get south, stay warm, and survive.

Over the past 18 months, the Bank of England has raised interest rates 13 times. From nearly 0% to 5%, this has gone from a record low to the highest levels seen since before the Great Financial Crisis of 2008. The Federal Reserve in the US has followed a similar road as they remain laser-focused on beating inflation.

The mission is similar – get inflation heading south and under control and grow the economy.

In the UK however, inflation has just left everyone scratching their heads this year, including the Bank of England. In the US, inflation has come right down from 9% last June to 4.05% last month. In the UK it has managed to drop only marginally from 10% to 8.7% in May.  And core inflation (which excludes unpredictable oil and food prices) is at the highest level since 1992.

Why is inflation in the UK such an outlier and so much worse than anywhere else? Because our labour market is tighter (a nod to Brexit and the increase in the number of long term sick after the pandemic), import costs are higher (Brexit again), and it seems like company profit margins are also high.

The Bank of England raised rates by 0.5% to 5% at the last meeting. This was more than the market expected. But a wake up call was necessary.

After the inflation data and the rate rise, however, long term bonds actually went up (so yields were down). This is not as paradoxical as it sounds

The yield curve is starting to invert. This means that UK bond yields for 1 or 2 years are higher than those for 10 years. The market is telling us that these high rates are not going to last forever and cuts at some point are on the horizon.

This means a recession could be imminent.

So what should we be doing? For most of us now, reducing our debt could be our most important financial priority. If we fail to plan then we plan to fail. Here are some tips to consider-

  • If you are on a variable or tracker rate – consider overpaying your mortgage if you can afford to, either in lump sums or regularly
  • If your fixed rate is expiring over the next few years – save and build up excess cash ahead of that with a view to paying it down when it expires.
  • Speak to your broker or lender to see if you can tweak your mortgage payments and make them more affordable in the short term – this could mean moving part of your mortgage to an interest only deal or extending the term, or both.
  • Be smart with your cash. We can’t stress this enough. If you are earning less than 4% on easy access accounts you are just helping bank CEOS earn higher bonuses. Tax free premium bonds from National Savings and Investments also make sense for higher and additional rate taxpayers
  • Rein in your spending – and shop around for deals. Profit led inflation is a fact.

It’s important also not to panic! It’s ok sometimes to put other plans for investing and savings on hold to reduce high interest debt today. You can always revisit it down the line.

Paying off debt always felt good, and now after many years of low interest rates, it also makes a lot of financial sense.

If you would like to discuss your specific situation and financial plans, and what the base rate rise means for you please get in touch.

  • Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing debts against your home.
  • Not all mortgage contracts are regulated by the Financial Conduct Authority.
  • This blog  is for information purposes and does not constitute financial advice, which should be based on your individual circumstances

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