Bank Of England Raises Interest Rates

The Bank of England raised interest rates on 22^nd September by 0.5% to 2.25%, its highest level since 2008.

The rise was voted for by five members of the monetary policy committee, with three members voting for a 0.75% raise, and one for a 0.25% raise.

This is the seventh time the bank has raised interest rates, as a mixture of pent-up demand post the pandemic, supply chain issues, and the war in Ukraine has led to spiralling inflation.

This will mean an increase in mortgage repayments for people on a variable rate, but also a welcome rise in the level of interest received on cash savings.  Although many accounts offering higher rates have restricted withdrawals or fixed terms.

While holding some cash for emergencies and short-term planned spending is a good idea, it isn’t the best way to hedge against inflation over time, as the spending power of cash will be eroded.

Looking back over 10 years, see this chart. A typical balanced investment portfolio has provided a higher return than both cash (represented by the Bank of England based rate + 1%) and inflation (represented by the Retail Price Index).

Comment

The good news is that with many investment opportunities around, there are ways to avoid inflation eroding wealth. While there is undoubtedly more risk associated with investing than depositing cash into a bank account, there are many ways to mitigate those risks.

With inflation still at elevated levels, it becomes imperative that investors acknowledge the detrimental impact that rising prices can have on their wealth. As experienced investors will know, there are ups and downs in every individual’s investment journey but over the longer term, by investing at an appropriate level of risk with which investors can feel comfortable, and which is constantly monitored, an investment strategy can be formed and managed to help protect against inflation.