Earlier this month the Bank of England (BoE) released its Monetary Policy Report, providing an economic forecast for the year ahead.
Andrew Bailey, governor of the BoE, stated it was good news, but also advised caution.
The report confirms that the UK economy will experience its fastest period of growth since world war two, with GDP expanding by 7.25% this year.
This does, however, follow a 9.9% fall in 2020, which marked the biggest economic contraction since the Great Frost of 1709.
Speaking to the BBC, Bailey confirmed that the recovery was strong, but that it was “more of a bounce-back” than a boom.
What does the economic forecast tell us about growth, interest rates, and inflation? And what effect will the recovering economy have on your financial plans?
Interest rates remain at a historic low
Savers have had a tough time of it, at least as far back as the global financial crisis of 2008. While the economic forecast is promising for the year ahead, BoE policymakers voted to hold interest rates at their record low of 0.1%.
This is bad news for any savings you are currently holding in cash.
When inflation is higher than the rate you are receiving on your savings, your money is effectively losing value in real terms. And inflation is expected to rise as the economy recovers (more on which later).
Low interest rates could be affecting your mortgage too.
If you have a fixed-rate mortgage – based on the rate your provider was able to broker with the central banks – low rates won’t have affected your repayments.
With a mortgage linked to the Base rate, or your lender’s standard variable rate (SVR), however, you might have seen a reduction in your repayments over the last 12 months.
If you are looking to remortgage or switch mortgage, you might need to act fast in case interest rates rise later in the year. Also remember there will likely be early repayment charges (ERCs) or exit fees if you switch, overpay, or pay your mortgage outright.
Be sure to speak to us before you make any changes to your mortgage and we’ll help decide if it’s right for you, and help find you the best possible deal.
Could inflation be set to rise?
The BBC reports that inflation jumped to 1.5% in April 2021, up from 0.7% the previous month.
As coronavirus restrictions lift, spending is set to increase further. With both the pandemic and Brexit restricting the goods available in shops, demand could outstrip supply. Consumer prices are already rising at their fastest rate since the outset of the pandemic and could soar even higher.
Rising inflation is unwelcome news for your investments, as it reduces the value of your returns in real terms.
While the BoE reports that unemployment figures are not as bad as predicted, this too could have a knock-on effect on inflation.
The Office for Budget Responsibility had previously forecast peak joblessness of 12% but the latest forecasts suggest unemployment could now reach 5.5% in the autumn. Some commentators suggest a job mismatch could lead to an increase in wages.
If this occurs, it could further increase the nation’s capacity to spend and thereby put extra pressure on prices.
Inflation isn’t only bad for investors; it can harm your pension too.
The value of your pension pot and the withdrawals you make diminishes in real terms as inflation increases. You’ll need to be especially careful when deciding how much to withdraw.
Any excess pension you take but don’t use straight away will likely sit in your savings account. As we have already seen, the historically low rate of interest you receive will not keep pace with inflation.
One solution might be for the BoE to increase interest rates to help temper rising inflation, but there are no signs of that yet.
Focusing on the long-term is key to reaching your goals
The forecasted increase in GDP and employment figures have in part been a result of the success of the vaccination rollout. This has, so far, allowed the government to stick to its roadmap out of lockdown and as restrictions lift, we will likely see a rise in spending.
A growing economy is good news – increases in GDP are linked to higher incomes, reduced poverty, better standards of living – but as the BoE were quick to point out, current forecasts for huge growth will only return the UK economy to its 2019, pre-pandemic, size.
Policymakers also made clear that the economic outlook “remains uncertain” and will continue to be linked to the “evolution of the pandemic”.
The economy is a living organism, with each part intrinsically linked to every other. A fast recovery impacts everything from your savings and investments to your pension and house prices.
While rising inflation could be bad for investors, it could also lead to a rise in interest rates, which would help savers.
The important thing is to focus on the long-term. Fingerprint can help you do that.
The plan we put in place for you is aligned with your financial goals and with our years of experience, we are best placed to help you cut through the noise of economic uncertainty.
Get in touch
If you would like to discuss any aspect of your long-term financial plans, including how they could be impacted by UK economic growth, speak to us now. Get in touch by emailing firstname.lastname@example.org or call 03452 100 100.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.