This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
At the end of September 2022, the British pound (GBP) hit its lowest value in 50 years. It stood at $1.03 on Monday 26th September. The last time it traded at this level was in February 1985, when the GBP fell to $1.052 (a record low that lasted 37 years). With news still pouring in about our currency and how markets – and politicians – are reacting, it is important to take a step back and consider what the implications might be for your financial plan. Below, our team at Elmfield Financial Planning here in Burnley examine this in more detail. We hope this content is useful to you and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
Why is the British pound falling?
It was in 1985 when GBP last fell to similarly low levels, primarily due to the rising strength of the US Dollar (USD). Then US President Ronald Reagan introduced a series of spending rises and tax cuts, leading to a rise in long-term interest rates which pulled in a large amount of investment (sending the USD soaring).
Today in 2022, the falling GBP is primarily due to market anxiety about the new UK Chancellor’s “Mini-Budget” announced on Friday 23rd September. Many investors are nervous about the tax-cutting plans outlined by Prime Minister Truss’s new government. Widespread uncertainty is still rife about how these cuts will be funded, especially now that government borrowing is more expensive (due to higher interest rates on newly-issued bonds).
Short-term implications of the falling pound
Naturally, a weak GBP versus the US Dollar means that international travel is likely to become more expensive for British tourists (as many currencies require that you first convert your GBP to USD). American goods here in the UK are also likely to become more expensive. The new iPhone 14 Pro, for instance, was recently increased in launch price by £150 for UK customers. Apple, its manufacturer, stated that part of the reason was due to the rising value of the USD versus other currencies.
Companies may be forced to pay higher prices for core ingredients for their products, which can then get passed down to consumers. Craft beer is very reliant on US hops, for example, and so the British beer industry may be forced to raise prices. Oil and gas are also priced in USD on the wholesale market, so British drivers could also soon face higher costs at the pumps.
The financial planning implications of a weak GBP
A falling pound has broad and complex repercussions on the wider economy which then can impact your financial plan. Firstly, the Bank of England (BoE) may be forced to raise interest rates again, after already raising them to 2.27% (the highest rate in 14 years) just before the Mini Budget was announced. Indeed, markets are anticipating that interest rates could more than double to 6% by spring 2023. In which case, mortgages are likely to get more expensive.
If this transpires, then the average refinancing of a two-year fixed-rate mortgage would see the monthly payments go up to £1,490 (up from £363). To prepare for a possible rise in rates in the coming months, therefore, many households may benefit from setting money aside now, ready to help navigate the transition to a possible rise in mortgage costs. Those who are nearly at the end of their fixed-rate deal may want to speak to a professional about remortgaging now, rather than before early 2023 when interest rates could rise further.
Expectations of future interest rate rises also pushed the benchmark 10-year gilt yield up to 4.2% (a 10-year high) in the 48 hours following the Chancellor’s Mini-Budget. This represents a four-fold increase in yields and a fall in bond (gilt) prices as investors sell off due to fears over the state of the economy. Unfortunately, this could affect people who are approaching retirement and who have already defaulted to a “lifestyling” strategy (when portfolios move away from stock market investments to longer-term government bonds). Rather than letting your retirement investments “drift”, consider speaking to a financial planner about how to best tailor the portfolio in light of your goals, risk tolerance and investment landscape.
Invitation
The UK is going through challenging economic times and the news is often changing about the financial markets. With so many headlines (many alarmists in nature), it is easy to lose sight of your long-term goals and become disproportionately focused on the immediate financial picture. By working with a financial planner, you can gain a clearer perspective and sense of calm about how to approach developments such as the falling pounds and what to do in light of your overall financial goals and strategy.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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