We have been living in virtually interest free times for so long now, what were considered ‘normal’ interest rates of 6% now seems usurious to us. It is worth reminding ourselves that the current interest rates are very unusual; the Bank of England was found in 1694, interest rates of 1/2% had never been seen until 2009. with inflation at 2% savers are still losing money on their deposits.
The UK economy is currently the best performing large developed economy – as a child of the 1970’s that fact seems incredible. Assuming the economy continues to perform well, we can expect interest rates to go back to normal rates maybe towards the end of this year, or definitely next year. Since our economy leads the pack, we can expect the ‘normalisation’ of our interest rates to lead the world too. So what do we need to prepare ourselves for?
How and when?
When interest rates increase they will do so because there are inflationary pressures in the economy. Interest rates might have to increase back to ‘normal’ quite rapidly – say over a 12 month period – to control inflation.
The good news
Interest rates will only increase when the recovery is established so you’d expect lots of jobs around, wages to be increasing and business to be prospering. In many ways rising interest rates are the sting in the tail of a whole load of good news.
There are many more savers than borrowers. Increases in interest rates will benefit most people.
Inflation could build up quite quickly, all that electronic money printing that was done a few years ago could very easily bubble up as inflation now. How do you protect yourself?:
- Inflation can destroy cash savings, make sure you have a balanced portfolio.
- Keep reviewing your prices, inflation can destroy profit margins. Be careful if you are fixing your prices for a number of years.
Inflation is being controlled for now by the strength of the pound and the reluctance of businesses to scare away customers with higher prices.
Need more advice?
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