Holly's Blog: Relief rallies, higher rates and why current accounts suck
18 Mar, 2022
Wow. 2 years since the start of the pandemic. Anyone else still remember that sense of slack-jawed horror, and Oh My God shock, after the first news conference telling us to stay at home? When securing a supermarket delivery slot was as exciting as securing a bottle of cider from the off-licence aged 16?
It’s been a pretty hectic 2 years on the markets. DIY investors have soared in numbers. Our cash savings shot up in 2020 but are busily being depleted again. Bitcoin has gone up and down like non fungible yo-yo. The formerly unloved FTSE All-Share has been chugging away and is up over 40% since the worst days of the pandemic meltdown. US tech stocks ruled the roost last year but have been falling since December last year. And commodities funds are to Spring 2022 what meme stocks were to Spring 2021 – a trader’s delight.
Relief rally
All eyes were on the US Federal Reserve this week, as they raised interest rates for the first time since 2018. Many had anticipated a higher hike than the 0.25% increase, and so there was a financial sigh of relief which, coupled with hopes for talks in the Ukraine, drove markets higher.
The tech-heavy Nasdaq is up about 4% since the Fed’s announcement. (Tech companies are often about tomorrow’s potential rather than today’s actuals, so they don’t do so well with higher interest rates which make growth harder and valuations a bit limper).
The powers that be have suggested that we may see 6 further raises in the US this year as inflation bites.
Back in Blighty interest rates soar in a 50% shocker!!
(Sorry – just channelling my inner The Sun sub-editor there). Put another less dramatic way, the Bank of England raised rates from 0.50% to 0.75% yesterday. And relax!
They need to keep inflation under control and higher rates curb our enthusiasm for spending today. Right now, inflation is like a rabbit on heat and is tipped to hit 8% in the summer months. Anyone who has recently filled up a car, done a weekly shop or signed a rental agreement won’t need me or an economist to tell them that inflation is biting.
So what’s next?
The Bank of England sprinkles little breadcrumb-y clues about what might happen next, doing what the nation’s Financial Parents will see as Managing The Children’s Expectations. We were told that the “market-implied path” for future rates is hovering around 2% by the end of the year.
This is no different to giving a 5-year-old progressive notifications that a play date is going to end in 20 minutes/10 minutes/ 2 minutes. The market-implied path is that your ability to shove Haribo in your mush is coming to an end and the future looks a bit less fun – and if I tell you a few times you are less likely to have a strop.
Those not on a fixed rate mortgage will note an increase pretty damn quickly. Got credit card debt? Make sure you’re paying this off monthly or investigate moving to a 0% deal.
Got savings in the bank? Unfortunately, don’t hold your breath! There is a very dilute connection between what the Bank of England say is the UK’s interest rate and what your current account will pay you.
So what do current accounts pay?
I have an account with HSBC. I tried very hard to find out what the interest rate was yesterday. After 10 minutes of much swearing and rummaging, on page 47 of their PDF of personal banking terms and conditions, I learned that “We’ll tell you your interest rate when we open the account and you can contact us to find out your current rate.” That’s a bit lazy, no? I’m guessing the answer is about noughtpointnoughtnotmuch. I did learn on page 49 that interest rates we pay them on an overdraft are 34.05%. Oy caramba!
On a mission for info, I opened my Monzo app for comparison and found within 15 seconds that I could set up a linked easy access saver with £10 which would support next working day withdrawals and pay 0.31% interest. I opened this account in about 20 seconds in the app. Better than a slap in the face with a wet kipper, and this transparency and ease of use shows up all the traditional players in a pretty poor light.
The moral of this story is that we should:
Look at our mortgages – variable or fixed? If interest rates go up to 2% – what does that look like for you? A bit of homework won’t hurt
Credit card debt – ouch. Try to prioritise or transfer
Cash – for gawds’ sakes if you have any, do not leave it in a current account!
If you do need cash savings for shorter-term needs, then at least look at easy access accounts. Or check out some 1- or 2-year fixes. The best ones are paying about 1.55% at the moment
Saving for the kids? The best online cash Junior ISA I can see today is the Coventry Building Society paying 2.35%. (But cash for babies, with an 18 year time frame and inflation heading to 8% is a bit nuts, guys – so at least consider a shares JISA for younger kids?
If your long-term savings are in cash, then you and I need to have a very stern conversation! At least consider some of the easy-to-start ready-made portfolios with some small amounts to test the waters and to see what it’s like?
Use your tax allowances – I wrote last week with some tips on Lifetime ISAs, pensions, ISAs and Junior ISAs
One thing that is a constant is that the ‘freebie’ Government top-ups in Lifetime ISAs and pensions are still the best game in town for most of us – you have just over 2 weeks to use this year’s allowances
It’s use it or lose it when it comes to our annual allowance, so to quote Gwen Stefani – What You Waiting For?
Have a good weekend everyone. Enjoy the sun (hopefully).
