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Views on the News

20 June 2022

3 minute read

A weekly round-up of the leading business, personal finance, investment, savings and pensions stories in the press from the past week, including analysis and opinion from our experts.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • Bank of England raises rates to 1.25%
  • US Federal Reserve raises rates by a 30-year high
  • High inflation means end of the ‘4% rule’ for retirees.

Bank of England raises rates to 1.25%

UK interest rates have risen further as the Bank of England attempts to stem the pace of soaring prices. Rates have increased from 1% to 1.25%, the fifth consecutive rise, pushing them to the highest level in 13 years.

The move comes as finances are being squeezed by the rising cost of living, driven by record fuel and energy prices. Inflation – the rate at which prices rise – is currently at a 40-year high of 9%, and the Bank warned it could surpass 11% later this year.

The Bank said rising energy prices were expected to drive living costs even higher in October, but added it would "act forcefully" if necessary should inflation pressures persist1.

Our view: The decision to raise interest rates by only 0.25% disappointed investors who were hoping for a larger increase to bring down inflation. As a result, investors continue to ramp up bets that interest rates must rise further. For example, markets expect an additional 1.8% of rate hikes by the end of this year, which would bring rates to just over 3%. However, the Bank of England (BoE) continues to believe that economic growth will slow meaningfully next year so there is less need to tighten as aggressively.

Part of the problem is that monetary policy tends to act with a long lag, so the effects across the economy may only be felt after a while. On the other hand, the labour market is running hot and the UK could find itself caught up in a wage-inflation spiral, whereby higher wages drive inflation even higher. If the BoE continues to hike rates more slowly compared to market expectations, then we are likely to see continued downward pressure on the pound versus other major currencies. (Sean Markowicz, Investment Strategist)

US Federal Reserve raises rates by a 30-year high

The US Federal Reserve unleashed its biggest interest rate rise in nearly 30 years last week, underscoring its determination to bring down runaway inflation in the world’s largest economy.

American rate-setters lifted interest rates by 75 basis points, the single biggest tightening in monetary policy since 1994, after a two-day meeting. It is the Fed’s third consecutive increase since March and comes after a 50-basis-point rise last month to bring rates to a range of 1.5% to 1.75%.

US consumer prices climbed by 8.6% year-on-year last month, the highest pace since the early 1980s, driven by a booming jobs market and inflationary pressures unleashed by unprecedented fiscal stimulus to fight off the pandemic2.

Our view: The aggressive interest rate path set by the US Federal Reserve (Fed) sent equity and bond markets tumbling last week, as fears mounted that tighter monetary policy could send the US into a recession. Energy prices took a beating as well over concerns that demand for oil would be negatively affected. Note that past performance is not a reliable guide to future performance.

Ultimately, economic growth will need to slow meaningfully to get inflation under control, but it’s not clear how high interest rates must rise to achieve that goal. We believe the key turning point for risky asset classes will be once inflation is trending downwards, but so far there is little evidence that we are close to that point. Until then, we expect volatility to continue in markets. (Sean Markowicz, Investment Strategist)

High inflation means end of the ‘4% rule’ for retirees

All retirees drawing an income from their savings face the same dilemma: how much can they safely take out each year without having to worry their money will run out?

For many years, the ‘4% rule’ devised by US financial-planning guru William Bengen has been used as a benchmark. This says that if you set your spending at 4% of your savings in your first year of retirement and increase that amount each year to keep pace with inflation, your money should last for as long as you’re likely to need it.

However, in the context of the current market environment, Bengen now thinks 4% could be too much.

The ‘4% rule’ is based on the historic performance of US equities and Treasury bonds. However, he thinks historical trends are less certain now, because high inflation is eroding the value of savings more quickly, while elevated stockmarket valuations could mean an imminent bear market. Thus retirees should be more cautious, at least until it’s clear whether these conditions are here to stay3.

Our view: The article highlights the importance of retirement planning and regular reviews to ensure there is enough money for a comfortable retirement. Cashflow modelling could also help demonstrate how long money is likely to last well into retirement, taking into account planned expenditure, including future costs such as care.

There are also alternative tax efficient investments that could form part of a retirement planning strategy such as ISAs, VCTs, and Offshore Investment Bonds, as many are choosing to leave their pension assets invested and will ultimately form part of their estate planning.

Barclays Wealth Planning offers a number of solutions to help clients with wealth structuring, retirement, and intergenerational planning. For an introduction please contact a Wealth Manager. (David Nguyen, Wealth Planner)

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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