You have probably seen the headlines revealing heavy falls in the pound’s value, largely because of economic uncertainty created by former chancellor Kwasi Kwarteng’s “mini-Budget”. After Mr Kwarteng announced his economic roadmap, which included a major overhaul of taxation, the pound fell to an all-time low of $1.03.

While sterling then recovered to its pre mini-Budget level, the fall triggered a series of events including the Bank of England (BoE) launching a £65 billion bailout for the bond market. Furthermore, the FTSE 100 suffered a downturn and mortgage providers withdrew products over fears of a substantial interest rate hike.

To calm the markets and restore some financial stability, the government U-turned on most of the announcements made in the mini-Budget, and appointed Jeremy Hunt as chancellor, replacing Mr Kwarteng.

While this has helped stabilise the pound, the UK’s economy remains uncertain, which means there is still a possibility that the pound could drop again before the end of 2022. Read on to discover three ways another fall in sterling’s value could affect your finances.

1. The price of goods could rise further

A drop in the pound’s value typically means that the cost of raw materials or goods bought from overseas goes up. Because of this, the price of gas, fuel and items such as electrical goods is likely to rise.

According to the Times, Apple raised the launch price of its new iPhone range in Britain by up to £150, thanks in part to a weak pound. Although it’s not only the price of goods that is likely to rise, a report in the Guardian reveals that Britain imports more than half of the food it eats.

This means a weaker pound could push up the cost of many food items, and with it, your weekly shop. If this were to happen, it’s likely the UK’s inflation level – which measures the rising cost of living – will rise further, which may mean that interest rates increase too. Let’s consider this next.

2. Interest rates will rise

If a falling pound pushes the price of food and other goods up, the BoE could increase its interest rate to lower soaring inflation. Historically, interest rates have been used to cool inflation as it increases the cost of loans and mortgages, which reduces disposable income.

This then reduces consumer spending, which is a key driver of inflation. This is one reason why the BoE increased its rate to 2.25% in September 2022 – the seventh increase in a row.

Furthermore, the media has predicted further hikes are likely, and this could be bad news for borrowers who will see repayment costs increase. This could be particularly true for those with certain types of mortgages, such as standard variable rate (SVR). This is because these mortgages typically follow the BoE’s rate movements.

If you are thinking about a mortgage, you may have already seen the Sky News report that reveals that the average interest rate rose from around 4.75% on the day of the mini-Budget to above 6%. That said, there is some good news, as you may be able to secure a fixed-rate deal that could shield you from any further rises.

If you already have a fixed-rate mortgage it’s unlikely to increase until your deal ends. If you are coming to the end of your deal, you probably want to consider your options, as lenders typically switch fixed-rate mortgages to a standard variable rate (SVR) when they end.

While higher interest rates might be good news for savers, be careful. If you hold too much money in savings accounts, it might reduce in real term value as your money may not be keeping pace with the rising cost of living.

If you look at Moneyfacts you will see that on 18 October 2022, the top easy access savings account paid just 2.55% and the best five year fixed-rate only offered 5.1%. This is significantly lower than inflation, which the Office for National Statistics revealed stood at 9.9% in August 2022.

One way you may be able to inflation-proof your money is to consider investing it, as historically, the stock market has provided greater long-term growth potential than cash. Research by Schroders revealed that between the start of 1952 and the end of May 2022, UK equities returned 11.7%. Cash returned an average of 6%.

3. The stock market could become more volatile

If you have investments, a weaker pound could result in the stock market becoming even more jittery. This is because the falling pound could push up the value of raw materials and reduce company profits, which could result in businesses facing an uncertain future.

This in turn could spook the markets. While short-term downturns should always be expected when investing, it’s important to stay calm and focus on your long-term objectives when they happen.

Making a knee-jerk decision to sell your stocks in an attempt to limit losses could deprive your money of any chance to recover when the markets bounce back. To demonstrate this, consider the following illustration, which shows the performance of the FTSE 100 in the 25 years up to September 2022.

The index tracks the largest 100 companies registered on the London Stock exchange.

As you can see from the values on the right-hand axis, despite significant downturns along the way, overall the index bounced back and has increased in value. If you had sold your shares during these downturns, your money would have missed out on the subsequent growth when the index recovered.

Get in touch

If you would like to discuss how a weaker pound could affect your wealth, or why investing during these volatile times might provide greater growth potential, please contact us on hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high quality service.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.