Impact of Interest Rate Increases to Curb Inflation
Published / Last Updated on 29/07/2022
The Federal Reserve in the USA increased interest rates on Wednesday by yet another 0.75% pa to present a new interest rate range of 2.25% - 2.50 pa in yet another real effort to control inflation. The USA is walking a tightrope as the economy slows and they do not want a full-scale recession, but inflation remains high, and they must try and control this.
The Bank of England has not been as aggressive with base rate increases and has so far only increased by 0.25% increments. That said, we suggest that the Bank of England may increase rates at the next Monetary Policy Committee meeting on 4th August 2022 by 0.5% to 1.75% pa.
This is a difficult call as Spain and Italy have reported economic growth, USA has gone into a ‘technical’ negative growth and we all know ‘when the USA sneezes, the rest of the world catches a cold’. It may be that the Bank of England expects a global slowdown anyway so rather than increase rates by 0.5%pa, they maintain 0.25% increments as the world economy slows down and inflation will fall away naturally.
We suggest not. Low interest rates mean a weak pound. By increasing interest rates, it will mean we all have less money to spend helping to reduce inflation.
In addition, there are many other ‘spin-offs’ because of interest rate increases:
- The £ becomes stronger and imports become cheaper which, will help curb inflation.
- More interest on your savings will mean more income tax to pay.
- Annuity rates will increase meaning if you are due to retire you may get a bigger income for life.
- With annuity rates improvement, the maximum you can withdraw each year from an older style ‘capped drawdown’ pension will increase at the next review.
- Higher annuity rates will mean a fall in cash equivalent transfer values of defined benefit and other safeguarded rights guaranteed annuity pensions will fall.
- Global and UK Fixed Rate funds (linked to gilts) will fall in value.
