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Morning!
There’s been a noticeable shift in the UK over the last few weeks. Inflation has started creeping higher again, mortgage rates are moving up, and government borrowing costs are sitting around levels we haven’t seen for years.
Not that long ago, most of the conversation was about when interest rates would finally come down. Now, suddenly, we’re hearing a very different question: could rates actually have to go back up?
That matters because higher borrowing costs don’t just affect governments and financial markets. They eventually filter through to mortgages, businesses, savers, investors and pretty much every household in one way or another.
So this week I want to look at what’s happening, whether the UK really is heading towards recession, and what all of this could mean for how we manage our money and build our portfolios.
Because worrying about the economy doesn’t make us wealthier. Making sure our money is working properly does.
THE 60 SECOND MONEY NOTE
UK inflation has moved back up to 3.1%, while the Bank of England has kept Bank Rate at 3.75%. Interestingly, three members of the Monetary Policy Committee actually voted to increase rates to 4%, which tells us that the conversation around interest rates has changed quite dramatically.
At the same time, UK government bond yields have been sitting above 5%, while mortgage pricing has also started climbing again.
None of these things on their own mean the economy is about to collapse, but together they show us that money is becoming more expensive again.
And that can have a knock-on effect across almost everything.
Why are UK government bonds suddenly so important?
You might have heard people talking a lot more about gilt yields recently. They’re not exactly the most exciting subject in personal finance, but right now they’re worth understanding.
Gilts are simply UK government bonds. In very basic terms, investors lend money to the Government and receive interest in return.
The interesting part is that investors are currently demanding a much higher return for lending that money than they were a few years ago.
That matters because government borrowing costs sit at the heart of the financial system. When those costs rise, it can influence borrowing costs throughout the wider economy.
Businesses may find financing more expensive. Mortgage pricing can come under pressure. Government interest payments increase, which leaves less room for spending elsewhere. Investors may also start demanding better returns from riskier assets.
With another Budget approaching, this becomes even more important. If the Government has to spend more simply servicing its existing debt, there is naturally less breathing room available for tax cuts, spending commitments or other measures.
In simple terms, money has become expensive again.
Are we heading into a recession?
This is where I think we need to be careful not to get carried away with the headlines.
If you spend too much time scrolling through financial news or social media, you could easily come away thinking the UK is already in a deep recession.
It isn’t.
Recent economic data has still shown growth, and consumer spending has held up better than some people expected.
That doesn’t mean everything is fine, though.
The UK is still dealing with higher borrowing costs, rising inflation, expensive mortgages, pressure on household budgets and a jobs market that doesn’t look quite as strong as it did previously.
That combination creates risk, but predicting exactly when a recession starts — or whether we even get one is incredibly difficult.
And that’s really the point.
I don’t want my investment strategy to depend on me being able to predict the economy perfectly.
I’d rather build a portfolio that can keep functioning whether we get a recession, avoid one altogether, see interest rates rise again or eventually move back lower.
