WEBVTT 1 00:00:07.400 --> 00:00:08.320 Hello, I'm Clare... 2 00:00:08.320 --> 00:00:10.120 and welcome back to Smart Investor... 3 00:00:10.120 --> 00:00:12.900 the series that helps you get to grips with investing. 4 00:00:12.900 --> 00:00:14.600 In this episode, I'm going to look at... 5 00:00:14.600 --> 00:00:17.710 what rising interest rates mean for your investments. 6 00:00:17.710 --> 00:00:19.820 Although we're frequently told about the impact... 7 00:00:19.820 --> 00:00:22.000 of higher rates on our savings and mortgages... 8 00:00:22.000 --> 00:00:24.130 it's often less clear what they might mean... 9 00:00:24.130 --> 00:00:26.040 for the rest of your finances. 10 00:00:26.040 --> 00:00:28.580 Please be aware that we can't offer personal advice... 11 00:00:28.580 --> 00:00:30.400 so if you don't feel confidence about making... 12 00:00:30.400 --> 00:00:32.090 an investment decision on your own... 13 00:00:32.090 --> 00:00:34.920 do seek independent, financial advice. 14 00:00:34.920 --> 00:00:37.150 Interest rates are closely linked to inflation... 15 00:00:37.150 --> 00:00:39.730 and if the Bank of England decides to increase rates... 16 00:00:39.730 --> 00:00:41.810 it's usually to help curb inflation... 17 00:00:41.810 --> 00:00:43.640 or the rising cost of living. 18 00:00:43.640 --> 00:00:46.500 Raising rates makes borrowing more expensive. 19 00:00:46.500 --> 00:00:48.070 This slows down demand for goods... 20 00:00:48.070 --> 00:00:50.700 because the cost of meeting existing debt repayments... 21 00:00:50.700 --> 00:00:52.370 or borrowing new money goes up... 22 00:00:52.370 --> 00:00:54.090 leaving us with less to spend. 23 00:00:54.090 --> 00:00:56.780 In turn, this helps reduce inflation. 24 00:00:56.780 --> 00:00:59.060 By contrast, when interest rates fall... 25 00:00:59.060 --> 00:01:01.450 lower costs encourage businesses and households... 26 00:01:01.450 --> 00:01:04.030 to borrow more, boosting the economy. 27 00:01:04.030 --> 00:01:06.210 The Bank of England has said that interest rate rises... 28 00:01:06.210 --> 00:01:08.170 are likely to be gradual and limited... 29 00:01:08.170 --> 00:01:09.820 over the next few years. 30 00:01:09.820 --> 00:01:11.690 Rising interest rates are good for savers... 31 00:01:11.690 --> 00:01:14.050 as they mean higher returns on savings accounts. 32 00:01:14.050 --> 00:01:15.910 However, they're often seen as... 33 00:01:15.910 --> 00:01:18.210 less positive for stock markets. 34 00:01:18.210 --> 00:01:20.460 Consumers and businesses tend to spend less... 35 00:01:20.460 --> 00:01:21.293 on goods and services when the cost... 36 00:01:21.293 --> 00:01:22.126 of borrowing is higher... 37 00:01:23.430 --> 00:01:26.030 affecting companies which supply these. 38 00:01:26.030 --> 00:01:27.790 Interest rate rises typically boost... 39 00:01:27.790 --> 00:01:29.300 the value of sterling too... 40 00:01:29.300 --> 00:01:30.750 which can prompt share prices... 41 00:01:30.750 --> 00:01:33.720 in large multi-national companies to fall. 42 00:01:33.720 --> 00:01:36.140 That's because many of them earn revenue overseas... 43 00:01:36.140 --> 00:01:37.770 so when sterling is stronger... 44 00:01:37.770 --> 00:01:39.380 it reduces their foreign profits... 45 00:01:39.380 --> 00:01:41.830 when they're converted back into pounds. 46 00:01:41.830 --> 00:01:43.150 When sterling is stronger however... 47 00:01:43.150 --> 00:01:45.270 it can give smaller companies a boost... 48 00:01:45.270 --> 00:01:47.080 as it strengthens the buying power... 49 00:01:47.080 --> 00:01:49.360 of their British customers. 50 00:01:49.360 --> 00:01:51.260 Some companies tend to fair better than others... 51 00:01:51.260 --> 00:01:52.560 when rates are rising. 52 00:01:52.560 --> 00:01:55.340 For example, interest rate rises usually signify... 53 00:01:55.340 --> 00:01:57.330 that an economy is strengthening... 54 00:01:57.330 --> 00:01:59.880 so financial companies may see an improvement... 55 00:01:59.880 --> 00:02:01.800 in their margins when their rates go up... 56 00:02:01.800 --> 00:02:04.505 meaning profits should in theory also rise. 57 00:02:04.505 --> 00:02:07.800 While steeper borrowing costs tend to benefit financials... 58 00:02:07.800 --> 00:02:09.280 sectors such as technology... 59 00:02:09.280 --> 00:02:11.086 or producers of non-essential goods... 60 00:02:11.086 --> 00:02:13.810 tend to perform less well because consumers... 61 00:02:13.810 --> 00:02:16.380 don't have as much spare cash to spend. 62 00:02:16.380 --> 00:02:17.530 Rising interest rates also impact... 63 00:02:18.530 --> 00:02:21.460 fixed income investments such as bonds and gilts. 64 00:02:21.460 --> 00:02:24.130 Bond prices tend to rise when interest rates go up... 65 00:02:24.130 --> 00:02:25.870 because the fixed rate of interest they pay... 66 00:02:25.870 --> 00:02:27.980 becomes more attractive to investors. 67 00:02:27.980 --> 00:02:30.450 Conversely, when interest rates fall... 68 00:02:30.450 --> 00:02:32.400 bond prices typically weaken... 69 00:02:32.400 --> 00:02:33.810 because the fixed rate of interest... 70 00:02:33.810 --> 00:02:36.170 they pay becomes less appealing. 71 00:02:36.170 --> 00:02:38.330 It's important to remember interest rates aren't... 72 00:02:38.330 --> 00:02:41.310 the only factor that can influence market movements. 73 00:02:41.310 --> 00:02:43.190 Other factors which can impact markets... 74 00:02:43.190 --> 00:02:44.860 include what's going on politically... 75 00:02:44.860 --> 00:02:49.010 general investor confidence, and economic growth prospects. 76 00:02:49.010 --> 00:02:49.970 As I've just touched on... 77 00:02:49.970 --> 00:02:52.420 the impact interests rates have on your investments... 78 00:02:52.420 --> 00:02:54.900 can vary depending on what you invest in. 79 00:02:54.900 --> 00:02:57.020 This is one of the reasons why it's a good idea... 80 00:02:57.020 --> 00:03:00.620 to spread your money and have a diversified portfolio. 81 00:03:00.620 --> 00:03:02.720 Investing across a wide-range of assets... 82 00:03:02.720 --> 00:03:07.470 such as stocks and shares, bonds, cash, and property... 83 00:03:07.470 --> 00:03:05.470 means that if one or more of your investment... 84 00:03:05.470 --> 00:03:09.860 falls in value in response to higher rates... 85 00:03:09.860 --> 00:03:14.250 others might rise and vice versa, evening out fluctuations. 86 00:03:14.250 --> 00:03:15.460 You should be thinking long term... 87 00:03:15.460 --> 00:03:17.790 at least five years for all of your investments... 88 00:03:17.790 --> 00:03:20.090 as there is risk that you could get back less... 89 00:03:20.090 --> 00:03:22.030 than you originally invest. 90 00:03:22.030 --> 00:03:23.300 We have lots more information... 91 00:03:23.300 --> 00:03:25.330 about investments and how interest rate changes... 92 00:03:25.330 --> 00:03:27.150 can affect them on our website. 93 00:03:27.150 --> 00:03:29.900 Which should help improve your knowledge and understanding. 94 00:03:29.900 --> 00:03:32.161 Thanks for watching and see you again next time.