Bank of England: Back to ‘normal’?

Following yesterday’s decision by the Bank of England to increase the UK Base Rate, rates are back to the 5% level that was considered normal ahead of the 2008 Global Financial Crisis, but are still below inflation. (Chart 1)

Chart 1 – UK base rates below inflation since the 2008 Financial Crisis

Source: Refinitiv Datastream as at 11/05/2023

Higher interest rates are appealing for savers, but cash offers very little protection from inflation over the long run. Keeping your cash on deposit over the 1970s and reinvesting the interest would have seen the value of your savings drop by 27% in real terms. So far since 2008, you’d be down 39% in real terms. (Chart 2)

Chart 2 – Real Return on Cash

Source: Refinitiv Datastream as at 11/05/2023

We’re hopeful that inflation will come down over the next year as lower energy prices feed through and the labour market cools, but we believe that the risk of further shocks in this new era of what we’re calling ‘Spikeflation’ suggests a diversified multi asset portfolio including short-term inflation hedges like commodities and long-term inflation-beating assets like stocks and commercial property. (Chart 3)

Chart 3 – Long run returns from Stocks, Property (versus UK RPI)

Source: Refinitiv Datastream as at 21/05/2023

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.