Interest Rates Aren’t Falling Yet. Does That Change My Investment Strategy?

Interest rates are still sitting at 3.75% in the UK. Inflation has moved back up to 2.9%, mortgage rates remain much higher than many homeowners were used to, and cash savings accounts are finally paying a reasonable return.

That leaves people with a genuine decision to make.

Should you continue investing? Should you keep more money in cash? Or would you be better off overpaying your mortgage and taking the guaranteed saving?

It also changes how we should look at the stock market. Higher interest rates affect company debt, consumer spending, property, dividends and the price investors are willing to pay for future growth.

I am not completely changing my strategy because of one Bank of England decision. However, the current environment makes certain parts of my investment process even more important.

The position in the UK right now

The Bank of England held Bank Rate at 3.75% at its July meeting. UK CPI inflation then increased from 2.6% to 2.9%, with higher household energy costs making a significant contribution.

The Bank’s target is still 2%, so inflation remains above where it wants it to be. It has also warned that inflation could rise again temporarily because of higher and more volatile energy prices.

At the same time, average fixed mortgage rates are currently well above Bank Rate. That is because fixed mortgage pricing is influenced by more than the rate announced by the Bank of England. Inflation expectations, gilt yields, swap rates, lender funding costs and competition between lenders all play a part.

This is important because people often assume a small cut in Bank Rate will immediately produce an identical cut in their mortgage rate. It does not work that neatly.

The latest figures can be found directly from the Bank of England and the Office for National Statistics.

Does cash now beat investing?

Cash is a much more realistic option than it was when savings accounts paid next to nothing.

If you need the money in the next few years, cash may be the sensible home for it. That includes your emergency fund, money for a house deposit, a tax bill or anything else you cannot afford to see fall in value.

Cash also gives you flexibility. If an opportunity appears in the market, you have money available without needing to sell another investment.

But cash still has drawbacks. Savings rates can fall, inflation reduces your real return and interest may be taxable when it is held outside an ISA. Over the long term, cash is also unlikely to provide the same growth as owning successful businesses.

For me, the important distinction is time.

Money needed soon should not depend on what the stock market does next. Money I am investing for 10, 15 or 20 years has a completely different job.

Cash paying a decent rate does not suddenly make shares pointless. It simply means shares need to offer enough potential reward to justify the added risk.