It’s highly likely that your clients have mentioned rising inflation and interest rates to you in the last 18 months.

Indeed, one could say that high inflation and interest rates have formed the two pillars of the cost of living crisis, a period which has understandably caused stress to many individuals.

As you’ll read about in more detail later in this article, rising inflation caused the Bank of England (BoE) to raise the base interest rate 14 times between December 2021 and August 2023. Unfortunately, while inflation is now slowing, interest rates may not be lowered as quickly as your clients might hope.

As such, talking to your clients about the possibility of higher-for-longer interest rates, and the effects this could have, is vital.

Here are some important subjects to cover with your clients, and how discussing these in depth with a financial planner could bring them peace of mind.

Interest rates were unusually low between 2009 and 2021

Between December 2021 and August 2023, the BoE increased the base rate from 0.1% to 5.25%.

As a result, many mortgage companies and other lenders have increased their rates too, making borrowing much more expensive than it was before. On a more positive note, banks and building societies are now offering higher interest returns on cash savings too.

The BoE implemented these increases in response to rising inflation, which, according to the Office for National Statistics (ONS) peaked at 11.1% in October 2022 before easing in 2023 – something we’ll discuss in depth later in the article.

But to understand how this move fits into the wider landscape of interest rates, we need to look back a little further.

Between February 2009 and May 2022, the BoE kept the base rate below 1%. This was a purposeful manoeuvre that made borrowing more affordable after the 2007/08 financial crisis that had understandably spooked consumers and had a heavy financial impact on many investors.

However, in the decade preceding the financial crash, the base rate remained at around a 5% average. During the 1990s it was even higher, standing at between 5% and 10%.

Discussing this with your clients isn’t about lecturing them on the history of the base rate – it’s about helping them to understand what to expect in the years to come.

Not only may they put the current base rate into perspective, but they could more readily accept that interest rates don’t usually sit below 1%, and that the past 14 years have been an anomaly compared to previous decades.

While there is no telling what the BoE could do in the next 5 or 10 years, preparing your clients for higher-for-longer interest rates may help them in the long run.

Although inflation has slowed significantly in 2023, it may not easily return to the Bank of England’s 2% target

Now that your clients are aware of how the base rate has been set historically, they might ask: “What about 2024? Will they keep going up, or drop again?”

While there is no crystal ball that tells us exactly how the BoE may act, and in turn how lenders, banks, and building societies may respond, the answer could lie with the rate of inflation.

As you read earlier, UK inflation peaked at 11.1% in 2022 before slowing significantly this year, standing at 4.7% as of October 2023.

While this is a positive indication that price rises are easing off, the BoE still has a target inflation rate of 2%. If inflation remains “sticky” at around 4%, the BoE’s Monetary Policy Committee (MPC) may elect to raise the base rate further in 2024.

In fact, in its December 2023 report, the MPC states that “Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term”, suggesting that the BoE are prepared to raise the base rate again if necessary.

And, even if inflation does move towards its 2% target, the BoE may not immediately drop the base rate in response.

Maintaining a 2% inflation rate may be challenging in today’s geopolitical climate, meaning that the BoE may choose to keep the base rate at around 4% in the medium term.

An element of predictability could bring your clients peace of mind

Although higher-for-longer interest rates may not be welcome news for your clients, it may be useful to remind them that an air of predictability could help them to manage their finances more easily.

If the base rate plateaus at around 4%, and subsequently the interest rates of lenders and banks do the same, your clients could find it easier to prepare for:

• Remortgaging, or buying a new home
• Taking out business loans
• Building a cash savings fund
• Growing their investment portfolio.

On top of this, it may also be prudent to discuss some positives of higher-for-longer rates. For instance, a consistent 4% return on your clients’ cash savings pot could equal significant gains in the long term.

While the BoE’s rapid hiking of the base rate might have proved stressful for your clients, a stabilisation of interest rates, even at a slightly higher rate than they are used to, could come as welcome relief.

A financial planner can help your clients factor higher-for-longer interest rates into their long-term plans

If your clients are concerned about interest rates remaining at their higher levels for a number of years, it could be wise for them to reach out to a financial planner.

We can look at areas of your clients’ finances that may be affected by fluctuating interest rates, as well as taking a big-picture overview of their wealth that puts these elements into perspective.

After that, we’ll work with your clients to form a robust financial plan that works with the elements they can’t control, not against them.

For more information, email info@wkmwealth.co.uk or call 0116 403 0138.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment 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.