What does inflation mean for IFAs and investors? We unpick the financial crisis

If we thought that life would be a little rosier post-Covid, we were sorely wrong. As the pandemic faded from the front pages and restrictions largely ended, Putin began a war in Ukraine that has dragged on for more than eight months. The conflict has caused significant human loss and misery, and European and global uncertainty. And while comparatively insignificant when weighed against those points, stratospheric fuel prices are powering rising inflation rather than people’s homes.

In the UK, we had three Prime Ministers in six weeks as Boris Johnson’s exit and Rishi Sunak’s entrance sandwiched Liz Truss’ record-breaking brief tenure. However, in that short time, Truss and then-Chancellor Kwasi Kwarteng’s mini-budget caused severe financial consequences that are set to last far longer than her 49 days in Number 10.

Events have happened bewilderingly quickly. A snapshot of the current state of play shows inflation reached its highest level since 1982 and, sitting at 10.1% (September 2022). Likewise, the pound almost achieved parity against the dollar, unseen in some 40 years. Our snapshot taken on 31 October pins its value at $1.13.

During all this upheaval, interest rates have also risen sharply, reaching heights last seen during 2008’s global financial crisis. The latest 0.75% rise is the biggest jump since 1989 and leaves the base rate at 3%.  

The key metrics driving UK interest rates

The biggest drivers behind UK interest rates have been rising swap rates, and the impact of both the Russia-Ukraine conflict and the mini-budget on UK government bonds. However, since the appointment of Sunak, yields have come back down.

Swap rates are the rates financial institutions borrow and lend money to each other, and also govern how banks and building societies price mortgage and savings products.

Financial institutions price their mortgage products in advance, using swap rates to hedge against rises in interest rates during fixed-rate terms. But uncertainty following the government’s mini-budget – and the side-lining of the scrutinising independent Office for Budget Responsibility – left lenders fearing their mortgages would be unprofitable.

The result saw the scrapping of more than 900 products, leaving many would-be house buyers high and dry, while those with mortgages now suddenly face huge increases in repayments.

The mini-budget also sparked chaos in the value of UK bonds. As the announcement of sweeping, unsupported tax cuts sent the market into panic, the price of gilts dropped sharply, while bond yields quickly rose to unprecedented levels. With UK pensions on the brink of a catastrophic collapse, the Bank of England stepped in to temporarily buy UK bonds to stabilise the market.

The new Chancellor, Jeremy Hunt, has since reversed almost all the measures announced in the mini-budget, which has positively affected markets. However, business analysts suggest September’s damage could linger for some considerable time.

How Flagstone can help

“The near-reversal of all measures by Hunt and Sunak has provided stability to the UK rate market, so future expectations of rate rises have been tempered,” says Mark Hicks, Head of Bank Partnerships at Flagstone.
“However, in the short to medium term, bringing inflation under control is going to be a key focus for financial markets and for central banks.

“Inflation is still high at double digits across the UK, US and Europe. And while the data shows no sign of dropping, central banks will need to be aggressive on rate rises to support the savings market.

“As a result, growth will come under pressure in the medium to long term, but we should then start to see some stabilisation and inflation coming under control.”

In the meantime, the cost of living has risen significantly, while soaring fuel prices continue to cause concern. Regardless of the savings people have, everyone is feeling the added financial burden. With inflation still volatile, our cash deposit platform provides a safe haven for cash deposits and enables people to take advantage of the rising interest rates to grow their money.

By opening their own Flagstone account, investors can access hundreds of savings accounts – including market-leading and exclusive rates – from up to 45 banks. Investors also receive FSCS protection of up to £85,000 (£170,000 for joint accounts) for each eligible savings account opened –providing security and peace of mind in unpredictable times.

Find out more about how our cash deposit platform can help investors both protect and grow their cash funds.

Speak to a member of our team