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How to shield your wealth from rocketing interest rates

The Bank of England today announced a 0.25 percentage point hike in interest rates to 1%, the fourth hike in five months, as it fights runaway inflation.

How should households protect themselves from the repeated rate hikes by the central bank? There are ways savers can benefit by switching to the best savings rates, investing in companies that can thrive when borrowing costs rise, and locking in cheap mortgage rates while they last.

A rate hike should be a prompt to review your finances. Here’s what savers, investors and homeowners need to do now.

Switch to the best savings offers

Those with traditional savings accounts have suffered from persistently low interest rates, and most have seen wealth drained from inflation over the past year.

However, savers can limit some of the damage caused by the rising cost of living by moving their cash. Most high street banks offer interest rates as low as 0.01 percent for easy deals, but the average rate across all banks is 0.39 percent. Banks have failed to pass on rate hikes in a meaningful way.

Fixed-rate savings accounts do not allow savers to withdraw upfront, so funds held in a low-rate account are unavailable until the end of the term. With interest rates expected to continue to rise, locking away your money at today’s interest rates may not be the best strategy.

Cash Isas tend to be more flexible. Although their rates are slightly lower than bonds, they usually allow early withdrawals with a penalty. These penalties vary by provider, but typically can amount to 90 days of interest on a one-year contract. Longer deals usually come with higher penalties.

James Blower of Savings Guru, a consulting firm, said: “In theory, you could make money by switching to a cash Isa deal with a better interest rate.” However, the rate the better Isa offers going forward would need to be sufficiently higher to offset the effects of the prepayment penalty.

Invest in companies that are profitable

Interest rates would need to rise significantly over the next year to keep up with inflation, meaning risking money in the stock market offers the best chance of keeping pace with rising prices.

Companies with strong pricing power and high profit margins, such as luxury goods or software brands that offer essential tools, won’t be too badly affected by rising prices, experts say. Fundsmith Equity, the £28bn flagship strategy managed by star manager Terry Smith, has big positions including Microsoft and L’Oréal, the luxury cosmetics company.

Another popular fund is the £1.4bn Morgan Stanley Global Brands Fund, which buys companies with loyal customers who are willing to pay more for goods and services.

Some stocks can even rise when interest rates rise. UK banks will be clear beneficiaries, according to wealth manager Quilter Cheviot’s David Henry.

“Higher interest rates mean bank margins will improve,” he said. “The difference between what banks can make on loans and what they pay for products like savings accounts widens as interest rates rise.”

said Herr Heinrich Barclays was his choice among banks listed on the London Stock Exchange. “Its valuation isn’t particularly challenging,” he said, pointing to a modest price-to-earnings multiple of four. The ratio measures how much a company’s stock costs relative to its earnings.

“Their investment bank has also done well, giving them an edge that many other UK retail banks don’t have,” he added.

https://www.telegraph.co.uk/money/consumer-affairs/prepare-finances-sustained-interest-rate-rises/ How to shield your wealth from rocketing interest rates

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