The US order up a Whoppa rate cut

In a slightly controversial move, this Thursday the Bank of England decided to keep interest rates at 5%, unlike their chums in the US who cut rates by a big ole 0.5%.

The stock markets were quite chipper about the unexpectedly whoppa US rate cut, and the main index – the S&P 500 (the collection of the 500 largest companies in the States which you can buy and sell on a stock exchange) – hit a record high on Thursday.

Stock markets like low interest rates – especially companies such as tech firms – because they're typically investing lots of money today, for hopeful profits tomorrow, and lower rates mean you can borrow more to plough into the company in the pursuit of growth. So you can hire more people, spend more on research and development, and generally ‘go large’. Wheeeee!

This Yankee rate cute also helped the FTSE 100 – because lots of companies in this gang do as much (often more) business in the States and across global markets as they do in the UK, so better signals about the economy’s health over there is good news.

There is also a knock-on impact on currency markets.

Imagine you're a global squillionaire, deciding where to put your money. If the UK is paying 5% for cash savings compared to the US with a range of 4.75% - 5%, you come to the UK. You buy sterling to do this and so demand for the pound goes up. It gets stronger. £1 today gets you about $1.33, compared to $1.24 about a year ago.

If everything else stays the same and the pound gets stronger, it can be bad news for the FTSE 100 club who sell so much in dollars and then convert profits to pounds back in Blighty. “Yay – we made $133, up from $124 last year – but oh, that’s still only £100”.

But if we look at the worry seesaw, the FTSE 100 held strong this week, which suggests that hopes about the US avoiding a nasty downturn are stronger on the jolly side, than fears about a stronger pound nibbling away at overseas profits are on the miserable side.

What else does this mean for our money?

For people coming up to retirement, or indeed anyone thinking about an annuity, these are still pretty strong. Annuities are basically a product which lets you trade in a lump sum of money in a pension account for a guaranteed annual retirement income in the future. If I give you £100 today, you will give me about £7 a year until I breathe my last.

According to Hargreaves Lansdown, a 65-year-old with a £100,000 pension could trade that in today to get about £7,100 from a ‘single life level annuity’. This means you swap your £100,000 savings pot for the promise of £7,100 a year for the rest of your life (that rate will not keep up with increases in the cost of living – that would be described as ‘escalating at RPI’).

With rates set to fall, it’s not a bad time to lock in an annuity if that’s what you’re after. The Government-backed Money Helper service has a helpful comparison tool. Do shop around and don’t just politely accept the first offer from a current pension provider. You have choice!

Cash savers will be pleased that this era of high risk-free returns is creeping on, although anyone with longer-term timeframes should really consider locking in a fixed rate deal. You can currently get a one-year fixed rate ISA paying about 4.6%.

Those in the lucky position of having a lot of cash and who are also higher rate taxpayers could do worse than looking at buying a bond. For example, you could buy a UK Government bond which 'matures' (or expires) on 31st January next year for about £98.69 today. You know you will get £100 back in January. And the £1.31 gain made in about 4 months would be tax free. Look at gilts on any major investment platform.

Mortgage holders on variable rates were denied any respite this week. The average fixed rate mortgage for 2 years is around 5.4%, although there are some at around the 4.2% mark. I don’t expect much change over the coming months as the market has already priced in anticipated cuts in rates.

As for stock markets, with global rates coming down, the bond markets are doing pretty well. (They typically do better when interest rates fall). My Invesco Tactical Bond fund is about as interesting as bonds ever get! 😊

If you're one of our newer readers (welcome!) or fancy some help building an investment portfolio, putting together some of the building blocks I’ve outlined here, this article I’ve written on how to get going might help. If you can’t quite cope with the idea of this yet, then a robo adviser is worth investigating as an easier way to start.

Well, it’s Strictly Week One. Yet again, I have only heard of two of the ‘celebrities’ – Toyah Wilcox and comedian Chris McCausland. Not entirely sure that I can be bothered to watch it, but I do say that every year and I seem to get sucked in somehow! Now I’m off to play the Best of Toyah… I’m going to turn this world INSIDE OUT… SCREAM AND SHOUT… Have a good weekend everyone.

Holly

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