When the pound sank to an all-time low against the dollar on Monday, you would be forgiven for thinking it was just another storm in the City that has little to do with your day-to-day finances.
But within hours, fears this may cause inflation to soar higher prompted analysts to warn that interest rates could hit a startling 6 per cent next spring for the first time since the turn of the century.
For millions of homeowners, who would face steep bill hikes, this was a terrifying prospect on top of existing cost-of-living concerns.
Pound down: After plummeting to a 37-year low against the dollar of $1.0386 during overnight trading in Asia on Monday, Sterling has since stabilised – and stood at $1.07 last night
It was also a bitter blow for holidaymakers with trips planned to the U.S., who will suddenly find their spending money doesn’t stretch nearly as far.
Yet for now, experts are calling for calm. Myron Jobson, senior personal finance analyst at Interactive Investor, says: ‘There have been a lot of worrying headlines, but the cost-of-living support measures mean that inflation might not go up to the levels previously feared.
‘We’re in the midst of this once-in-a-generation inflationary onslaught — but it’s not going to persist for ever.’
Today, Money Mail explains what the plunging pound means for your personal finances — and simple steps you can take to minimise the fallout…
What has happened?
On Friday, new Chancellor Kwasi Kwarteng announced a £45 billion package of tax cuts, the most generous the country has seen for 50 years.
A few days later, the pound, which was already at a 37-year low against the dollar, plummeted to a record low of $1.0386 during overnight trading in Asia on Monday.
Currency investors were spooked at the prospect of further state borrowing, while short sellers worsened the situation by betting the pound would fall further.
Sterling has since stabilised — and stood at $1.07 last night.
But with the future still unknown, household budgets could yet feel the impact. And the Bank of England has said publicly that it ‘will not hesitate’ to hike interest rates if necessary.
Inflation fight: Analysts warn that interest rates may hit 6% next spring for the first time since the turn of the century
Millions of homeowners have already seen their mortgage repayments jump following seven consecutive interest rate hikes since December last year.
The Bank of England base rate currently stands at 2.25 per cent — after being lifted by 0.5 percentage points last
Thursday. But analysts now expect further increases in November — with some warning the base rate could hit 6 per cent next year.
Around two million homeowners with standard variable loans would be hit almost immediately by bill increases.
Someone with a typical £150,000 loan on a standard variable rate will see their monthly repayments rise by £377 to £1,310 if rates rose to 6 per cent, according to broker L&C. A further 1.8 million borrowers also face higher mortgage costs because their fixed deals are due to expire before 2024.
Uncertainty over what interest rates will do next has also led scores of lenders, including Halifax and Virgin Money, to pull mortgages for new customers.
And Britain’s biggest building society, Nationwide, yesterday revealed that its two-year fixed deal would now start from 5.59 per cent.
This time last year borrowers could get the same deal at less than 1 per cent.
However, Dominik Lipnicki, of broker Your Mortgage Decisions, says: ‘It is important to remember that only a minority of deals have been withdrawn from the market. Borrowers still have hundreds of others to choose from.
Mortgage bills: Someone with a typical £150,000 loan on a standard variable rate will see their monthly repayments rise by £377 to £1,310 if rates rose to 6%, according to L&C
‘These fixes will return — even if they do at a higher rate. It is just a temporary move by lenders which want to ensure they know how much a loan will cost them.’
Yet there is no escaping that mortgage costs are rising — and fast. So if you are not planning to move home in the near future, now is the time to seriously consider locking into a fixed deal. Even if your existing deal has not yet ended, remember you can often secure a new rate up to six months in advance.
It may even be worth asking your broker if you should pay a modest exit fee to remortgage early.
Mr Lipnicki adds: ‘Do not just take the first option your current lender offers you, as they are unlikely to take into account any rise in your property value.
‘Speak to an independent adviser and make sure you are thinking beyond monthly repayment costs and the well-known High Street banks. And if you have to pay more per month to fix for longer, that may offer long-term reassurance.’
>> What next for mortgage rates? A wave of major lenders including Halifax pull deals from sale as market is rocked by rumours of emergency hike
On the flip side, higher interest rates could spell good news for savers who have suffered rock-bottom deals for more than a decade.
Savings rates have been edging up slowly since December, but momentum is now growing. Fixed bonds burst through the 4 per cent barrier last week for the first time since 2012. And the best easy-access account now pays 2.1 per cent, up from 0.71 per cent in January.
Also, National Savings and Investments (NS&I) yesterday boosted its prize fund by £79 million for Premium Bond holders.
Boost: Savings rates have been edging up slowly since December, but momentum is now growing. Fixed bonds burst through the 4% barrier for the first time last week
But High Street banking giants have been far slower to pass on rate rises. Santander’s easy access account still offers just 0.1 per cent.
This means it is imperative savers take the time to shop around for the best deals, with small banks and online accounts typically paying higher rates.
Anna Bowes, of website Savings Champion, suggests fixing some of your money into a good deal now. ‘The important thing to make sure of is that some of your cash is in an easy-access account for when you need it — but not one which is paying paltry rates.’
Even the best savings deals will not shield your cash from inflation, which is currently at a near 40-year high of 9.9 per cent. But by boosting your returns you will at least reduce the eroding effect.
Some financial firms say their phones have been ringing off the hook this week as investors take stock.
The impact on your investments depends on what assets you hold and where those companies make their money.
The FTSE 250, which is home to Royal Mail and retailers such as Marks & Spencer and Asos, fell to its lowest level since November 2020 on Monday morning.
This is because most of the companies on the index make a large proportion of their profits from the UK, so the index is more sensitive to a weaker pound. By contrast, FTSE 100 companies — such as drugs giant GSK — rallied.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: ‘Overall, the FTSE 100 tends to benefit from a fragile pound, because most big companies listed in London actually earn most of their money overseas, which will be worth more when it’s converted back into pounds.’
As with any stock market wobble, it’s important to avoid making rash decisions. If you sell in a panic, you may miss out on the market recovery.
Mr Jobson says: ‘People can take solace in the fact that the stock market has overcome big events to produce positive returns for investors. The key is to invest over the long term to give your investments enough time to smooth out the inevitable peaks and troughs of the stock market.’
That said, it may be a good time to look under the bonnet of your portfolio to ensure you are not too heavily invested in one sector.
Our mortgage has already doubled
Small business owner Betsy Benn worries about the impact of soaring interest on her family’s mortgage — while the plummeting pound is driving up costs at her company.
The 47-year-old says mortgage payments have already doubled in a year for the home she shares with her IT professional husband Andy, 50, and son Ben, 15.
The family, from Cheltenham, Gloucestershire, have an interest-only tracker mortgage, fixed at 1.25 per cent above the base rate, which cost £350 a month last year, but has now increased to £700.
Hefty bills: Betsy Benn says her mortgage payments have doubled in a year due to her tracker mortgag
Worse still, the mortgage is coming to an end and the Benns are looking for a new deal through their financial adviser while the market is in turmoil and products are being withdrawn.
Betsy says: ‘We are really worried because, as a family, we spend just within our means. Our mortgage has already doubled and we’ve had to make real sacrifices immediately.’
The Benns are saving money by not yet turning on the central heating. They’ve also signed up to an electricity deal that is cheaper at night, so they can cut costs by charging their electric car or running the washing machine while they sleep.
They have also stopped using the tumble dryer and are not booking a holiday next year.
At work, Betsy’s luxury gifts company faces its own woes because it purchases many of its products from China and shipping costs are all in U.S. dollars — against which sterling has hit an all-time low.
Coupled with the impact of energy price rises, it means transport costs are up 12 per cent.
‘We don’t want to discourage our customers but I think, ultimately, it will lead to a rise in the price we charge,’ adds Betsy, who employs three members of staff.
Workplace pension funds are no longer as reliant on the UK economy, so savers are shielded from some of the uncertainty.
This is because most retirement savers are investing in a wide range of stocks, shares and bonds around the world, thanks to the default funds their employers choose for them.
Becky O’Connor, head of pensions and savings at Interactive Investor, says: ‘Now, you are as likely to find large U.S. technology companies such as Apple and Amazon in a default scheme as big British companies.’
Those with portfolios tilted towards the FTSE 100 could benefit as companies with earnings overseas are boosted by the shaky pound.
However, anyone taking a retirement income through drawdown should consider how they manage their withdrawals.
Tom Selby, head of retirement policy at AJ Bell, says: ‘Taking out too much too quickly risks draining your pension pot early.
‘Clearly, if you decide to hike withdrawals to maintain your standard of living as inflation rises, the risk of exhausting your pot will also rise.’
On the upside, rates paid by annuities — which provide an income in retirement for life — have risen by 35 per cent in the last year for new customers.
At today’s rates, a 65-year-old trading in a £100,000 pot could now get a £6,637 annual income — up from £4,900 last year, according to figures from investment firm Hargreaves Lansdown.
And William Burrows, financial adviser at the Retirement Planning Project, predicts that they will jump even higher following the market’s reaction to government tax cuts.
Mr Selby adds: ‘Those who prefer not to keep their money invested in retirement — or chose to secure an income with a portion of their pot — will be able to get a bigger bang for their buck.’
Sir Steve Webb, former pensions minister and partner at LCP, adds that current volatility is unlikely to impact the state pension rise scheduled for April next year. It is predicted to go up by around 10 per cent, taking the payment over £10,000 a year for the first time.
Holidaymakers travelling to the U.S. will find their spending money does not stretch as far. In January £1 was worth $1.37.
But that same pound is now worth just $1.07. So for each £1,000 you exchange, you’d get around $300 less.
Those travelling to Europe have also seen the value of the pound dip from €1.14 to €1.11 in the last week.
However, there are still simple things holidaymakers can do to cut costs.
Squeezed: Holidaymakers with trips planned to the U.S. will have to pay more for their dollars
Simon Harvey, head of foreign exchange analysis at Monex Europe, says: ‘Holidaymakers heading to America in the months ahead may want to buy some of their dollars now, to take some uncertainty out of the trip.’
Jack Mitchell, head of travel money at currency firm FairFX, adds: ‘Keep a close eye on currency rates and patterns. Then if rates are looking more favourable, it could be worth considering locking them in on a pre-paid currency card.’
Websites like moneysupermarket.com and compareholidaymoney.com can help you find the best rates. Credit cards which offer fee-free spending, such as the Halifax Clarity, are also a good alternative.
A weaker pound means filling up your car could become more expensive as wholesale gas and oil is priced in dollars, and will cost more to import.
The average tank of petrol has already increased by £7.50 since February, according to the AA. But the cost of oil has also been falling, which means prices are not as high as they could be.
Yesterday, petrol averaged less than 163.5p a litre for the first time since early May, and diesel less than 180.5p for the first time since mid-May.
At the pumps: Filling up your car could become more expensive as wholesale gas and oil is priced in dollars
‘It’s a “good news, bad news” situation,’ says Luke Bosdet, fuel spokesman for the AA. ‘There is still a lot of price variation, with some fuel stations charging less than 155p a litre, so shopping around or using pump price search tools can bring down road fuel bills further.’
The free smartphone app Petrol Prices compares costs at almost 8,500 stations across the UK, and is updated daily. Or try WhatGas Petrol Prices.
Mr Bosdet adds: ‘The bad news is that those wholesale costs heading to the forecourts should be plummeting. The commodity value of petrol has slumped by more than 10 per cent but the weakness of the pound has helped to prevent that getting through to the pump.’
The 5p fuel duty cut announced by the Treasury in March is also helping. Without this, the current average price of petrol would be 19p a litre higher.
The RAC also says that fuel- efficient driving can help mitigate costs — including gentle acceleration and deceleration and keeping a consistent speed within the speed limit.
When the pound falls, it can push up prices in the shops as the cost of goods from overseas rises.
The UK imports more than half of its food. And as we move into autumn and winter, Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, warns that supplies of fruit and vegetables increasingly come from abroad, so we can expect some staples to get more expensive.
She says: ‘This is likely to be particularly the case for bananas, which are sold in dollars, and cocoa and coffee.’
Carlsberg chief executive Paul Davies also says the dip was ‘worrying’ for the British beer sector, which imports hops.
Technology, such as mobile phones, may also go up in price in UK shops if they are made abroad. But shoppers should not panic. Buy locally produced food wherever possible.
Meanwhile, UK firms selling goods abroad will also find their products are more competitively priced against global rivals.
‘Some big brands might be able to absorb the heightened cost of importing, and they will benefit from the cancellation of planned rises to corporation tax,’ says Mr Jobson, of Interactive Investor. This means that not all price rises will transfer to customers and supermarket shelves.