What rising inflation and interest rates mean for investors

Why investors and those planning for retirement need to keep calm and take a long-term view.

Last week saw the Bank of England (BoE) raise interest rates to 1.25% - its fifth consecutive rate rise, taking rates to their highest level since January 2009.

Meanwhile, yesterday saw UK inflation edge up to 9.1% in May from 9.0% in April - its highest level since March 1982.

Inflation has a debilitating effect on the economy, so the BoE is attempting to address this by raising interest rates. The theory is that, as rates are raised, people will save more, borrow less and demand for goods will fall, helping bring down prices.

However, given that inflation is expected to reach a peak of 11%, there are concerns in some quarters that the BoE is not doing enough to bring it down. In the US, for example, the Central Bank hiked rates by 0.75% at the last meeting, because of spiralling prices – and there are indications from the BoE that they may well step up the rate rises in the months to come.

So, with interest rates rising, inflation rising, a falling pound and a slowing economy, what does this all mean for you?

Obviously, the most immediate impact is on day-to-day household expenditure, with food, drink and petrol prices continuing to soar. RPI, which measures the changes in retail prices of a basket of goods and services, as opposed to the weighted average prices tracked by the CPI, rose 11.7%, up from 11.1% in April. Even with the BoE’s intervention, prices might not come down as quickly as we want, as the ongoing war in Ukraine continues to affect essential products like fuel and bread.

Beyond that, here’s some of the main ways you could be affected financially.


For those on a variable-rate mortgage, a fifth rate rise in six months will obviously hurt. Because of this, it may pay to fix sooner rather than later, with interest rates likely to continue to rise.

For those on fixed-rate deals, the rises will take a while to filter through. However, when their mortgage expires, they will find that the current average two-year fixed rate deal is 3.25%, up 0.92% from November, whilst the average five-year fixed rate mortgage is currently 3.37%, up 0.75%.

However, with the banks still sitting on a good chunk of lockdown savings, they can afford to fund cheaper deals, which means there are still some affordable mortgage rates available.

An alternative for some might be to look to extend your mortgage, so your monthly payments are still manageable.

If you are looking for mortgage advice on switching or remortgaging, contact us.

Savings and investments

Savers should technically benefit when the BoE increases the Bank Rate. However, whilst savings rates are now rising, they don’t come anywhere close to the inflation rate of 9.1%, meaning savers are losing in real terms on their hard-earned cash reserves. For example, the best easy-access savings account, from Virgin Money, pays 1.55%, whilst the best one-year bond is now 2.6% from Atom Bank.

The obvious usual route for better returns is to invest, but in this period of market uncertainty and volatility, this can also be disconcerting. It’s at times like these that investors need to stay calm, hold their nerve and remember the key investing principles – think long-term and diversify.

Long term thinking

It’s important to keep things in perspective and to remember that periods of stock market volatility are always temporary. Stock markets have been around for a couple of centuries and have witnessed many wars, economic disasters, recessions and bouts of high inflation. However, they have always bounced back to reach new heights over the long term.

So, whilst no one can predict when this current period of volatility will end, we do know that it eventually will.


Another important investing principle is diversification. This acts as a powerful risk-reduction tool and can certainly mitigate the effects of stock market volatility.

In the current market environment, different sectors are being affected in different ways. Some sectors, such as mining and oil stocks, are actually doing very well, due to elevated commodity prices. Rising interest rates have also helped those in the banking sector. However, other more growth-oriented stocks, such as technology, fintech and e-commerce, have suffered.

By holding a diverse portfolio across different sectors and regions, the adverse impact of stock market volatility can be mitigated.

Buy the dip?

Another favourite investment mantra is that when stocks are low, investors should buy the dip. This looks tempting when looking at high-growth sectors such as technology, which have seen stock prices fall significantly.

Apple shares for example, collapsed by over 50% during the 2008 financial crisis, only to make a full recovery within 10 months and then to climb over 1,900% to today’s price. So occasionally, a once-in-a-decade buying opportunity can emerge.

It could therefore be tempting to use the current volatile market as an opportunity to buy shares in strong businesses that can continue to thrive in the long term.

However, some experts are suggesting that investors exercise caution, as buying the dip at a time of geopolitical crisis has additional risks. A pound-cost-averaging approach – regular monthly investing – could be a better option for many.

Financial advice

These are uncomfortable times for all of us, with inflation hitting heights not seen for decades. For those of you looking to invest in your future or planning for retirement, a bit of professional financial advice might not come amiss. If that’s the case, please do not hesitate to contact us.


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