The lunatics are in charge of the asylum

Frankly this year is a big old guessing game about many things, with the outlook for interest rates a vital question for many of us. It’s one of those moments when you realise that the lunatics are in charge of the asylum and no-one has a scoobies what is actually going to happen.

GDP data out today showed a little increase in growth in November – just 0.3%, so nothing to get the trumpets out about. Travel and hospitality are still weak but there’s growth in computer games and telecommunications. And we spent a bit on Black Friday. Basically we’re going to the pub less, staring at screens more and buying stuff online. Bah!, said the grumpy parent.

In the jolly camp, headline inflation is 3.9% (not bad!) and mortgage rates are easing with some deals creeping in under the 4% mark. There are also expectations that Jeremy Hunt will pull some tax bunnies out of his hat in pre-election bribery on March 6th, which could mean more in our pockets every month.

In the less jolly camp, the tensions in the Middle East are casting shadows and messing with the oil price, which will have knock-on implications. If you can’t easily move ships through the Red Sea and if Iran seize oil tankers, then clearly we get less oil. And if there is less of something to go around, the price shoots up and if it’s a vital ingredient such as oil, it has a huge knock-on impact on prices across the board.

On the other hand, the big global oil guzzlers such as China are having a bit of a slowdown, so they are making less stuff and consequently need less oil. So there’s a medium-term slump because of one region, and a short-term spike because of another. This is what I mean when I say no-one has a scoobies what is going to happen. There are conflicting bits of information everywhere which make it very hard to form a consistent opinion.

In more local news, wage growth is slowing, the jobs market is tightening, and people rolling off cheap fixed mortgages are going to feel real pressure. Cold weather will also mean we’re spending more on heating in the month when the energy price cap has increased.

So what’s the outlook for rates?

I’m on the Bank of England’s Decision Makers Panel and provide input every month which is aggregated with lots of other businesses to give them a national picture of what’s going on at the coal face. This month in particular, they want to hear about a trading update as well as our intentions for future price hikes. What are we going to do in terms of putting prices up over the next 12 months?

They remain super focussed of course on inflation and I’m not sure we’ll see reductions in interest rates in the shorter-term unless growth falls off a cliff. Which it didn’t in November. Over the Atlantic, inflation actually came in higher than forecast for December, again dimming expectations of an imminent reduction in rates.

As we wait for inflation to normalise and rates to fall, in these unstable times it feels sensible for all of us to try and build up a cash buffer. A financial comfort blanket. And locking what you can in now makes sense as savings rates are likely to come down.

This week, the Premium Bond prize rate fell from 4.65% to 4.4%. This is an average, remember – not the return you will get. I don’t like Premium Bonds and think we can do better elsewhere. I know this is heresy to some, a bit like saying you don’t like Judi Dench or Colin The Caterpillar cake, but there you have it. The odds of winning are 21,000 to one – about the same as me getting into Size 10 jeans again. And you can get better returns elsewhere – rates of more than 5% are not hard to find.

I will begrudgingly say that premium bonds might suit some higher rate taxpayers who have maxed out their annual ISA allowance of £20,000 a year already, and who can afford to roll the dice and like a monthly frisson of excitement. But for the vast majority of us, there are better options in town, offering either the certainty of cash or the better longer-term potential of the stock markets.

On a final note, there was a big announcement from the regulator on Thursday about an alleged massive mis-selling scandal in the motor finance sector. Millions of drivers could potentially be in line for a pay-out as the FCA investigates whether consumers have been unfairly charged excessive rates on new and second-hand cars, with discretionary commission arrangements allowing dealers to adjust rates from lenders and so increase their commissions. This could apply to anyone who bought a car or a van on motor finance before 2021. Worth keeping an eye on this.

Have a wonderful weekend everyone. I have started watching The Traitors with the teens who have actually deigned to watch something on boring, old-fashioned TV with their mother – and we have three episodes lined up for a Saturday binge. I have a theory which is either ludicrous or genius. Which – to swing back to the beginning of this note – is probably what the Governor of the Bank of England is thinking too. Welcome to the asylum, Mr Bailey!

Holly

Want to get Holly's weekly blog straight to your inbox?

Sign up for no-nonsense tips, tricks and food for thought every Friday!

SIGN UP

I would like to hear from you about products, events, general marketing and other things from Boring Money – including personalised content and ads - but please try not to make them as boring as everything else in finance!

Already have an account? Login