Recent figures from the Office for National Statistics (ONS) confirm that inflation rose in June. The unexpected increase could make an interest rate reduction less likely when the Bank of England meet next month.
But why are interest rates linked to inflation, and what do the latest inflation figures mean for your savings, investing and borrowing?
Keep reading to find out.
Inflation remains high, with a knock-on effect for future interest rate cuts
The ONS confirmed on 16 July that the Consumer Prices Index (CPI) reached 3.6% for the 12 months to June, up from 3.4% in May.
According to the BBC, the rise was the result of higher-than-expected food and clothing prices, as well as increases in the cost of air and rail fares. The figure marks the highest inflation figure since January 2024.
Source: ONS
Having reached a 41-year high of 11.1% back in October 2022, inflation had been steadily falling, even dipping below the BoE’s own 2% target in September 2024. Since then, though, it has been slowly rising again.
The latest rise severely reduces the chance of a cut to the BoE base rate when its Monetary Policy Committee (MPC) meet next on 7 August.
This is because the base rate is one of several tools at the central bank’s disposal to help manage inflation and to try and keep it near its 2% target.
When the base rate is high, borrowing is expensive, but the savings rate might rise. This is expected to discourage spending, which can reduce inflationary pressure.
The BoE base rate hit historic lows during Covid (just 0.1%) before steadily rising to 5.25% by August 2023. It has been steadily falling since August 2024, with hopes of a further fall this August.
Source: BoE
A decrease is now less likely, as the BoE is once again forced to try to keep rising inflation under control.
The effect of inflation and base rates on you and your money
Savings
Rising interest rates are generally good news for savers, although there can be a delay before rates are passed on by high street banks. Generally, recent history hasn’t been kind to savers, and rising inflation could spell trouble once again.
This is because when inflation is higher than your bank’s savings rate, your cash fails to keep pace with increasing prices, and your money’s spending power is diminishing. Your money is effectively losing value in real terms.
Keep only what you need in cash – an emergency fund to cover unexpected shocks, say. Consider moving additional wealth elsewhere.
Investments
Moving cash into investments offers the chance for greater returns, in exchange for added risk. You’ll need to understand your investment goal, time frame and attitude to risk.
It’s worth noting that markets can experience short-term volatility, and this is especially true in the current geopolitical landscape of trade tariffs, conflict, and uncertainty in UK politics.
High inflation and interest rates can also directly impact businesses and business owners through increased costs of borrowing, higher overheads, and more expensive goods along their supply chain.
Your mortgage
Homeowners would have been hoping for a base rate fall in August, so June’s inflation figure will be particularly disappointing.
The BoE base rate effectively sets lenders’ interest rates, which have become significantly higher back in 2022 after the disastrous mini-Budget.
While mortgage rates are coming back down, how the next MPC decision affects you will depend on the type of mortgage you hold.
If you’re on a tracker- or variable-rate mortgage, your repayments are likely to remain high in the short-term at least, in line with the base rate. If you have a fixed-rate deal, you’ll need to keep an eye on rates as your current deal nears its end.
Interest rates are expected to continue falling in the medium term
While higher-than-expected inflation in June might scupper the chances of a base rate cut in August (though this is far from certain), the general direction of travel for the base rate is downward.
Inflation, too, can be expected to stabilise after last month’s blip but not immediately. The BoE expects it to rise to 3.7% in September before falling. How quickly and smoothly, though, depends on several factors, including tariffs emanating from the White House and the continued fighting in Ukraine and the Middle East.
The message for your finances remains clear: focus on your plan and avoid any emotional or knee-jerk reactions. Your plans are robust and long-term, exactly to ride out periods of uncertainty, and we’re always on hand to offer guidance and reassurance.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans, whatever the economic climate.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
