It's not what you do, it's what you say!!

Friday 11th November 2022

What a contrast as we are used to "action speaking louder than words" being the
mantra and yet last week the opposite was true of the UK and US Central Banks.
They, plus the European Central Bank, the week before, acted and increased
their base interest rates by 0.75% which was all pretty much expected. It was
however the comments that followed that meant so much and indeed was quite
a contrast between the UK and the USA. Comments are looked at as either
"Hawkish" which means they are in support of the raising of interest rates to
fight inflation, even to the detriment of economic growth and employment. Or
"Dovish" which means when they favour economic growth and employment
over-tightening interest rates.

The market is looking for the stance to change from hawkish to dovish and so an
end to the squeeze on money. In the UK, Governor Andrew Bailey indeed
delivered a dovish outlook, suggesting interest rates would likely not have to rise
as high as markets had anticipated and therefore that mortgage rates can be
expected to come down from their current heights. It is a recognition of the
change in Prime Minister, and corresponding change in stance from Truss's high
cost growth strategy, to Sunak's expected tightening in the Autumn Budget, due
next Monday. The bank base interest rate was expected to go to 6.30% under
Truss to a current 4.25%.

The messaging from the US Federal Reserve (Fed), a day earlier was the
opposite. While the statement similarly seemed to indicate that the intensity of
rate rises would slow down over the coming months, it was the Fed Chairman
Powell's press conference with his hawkish message that "the ultimate level of
interest rates will be higher than previously expected". US stock markets reacted
to this news with a two-day sell-off, although bounced back somewhat on Friday.
The US job market is still strong and this is the issue as it signals embedded
inflation via the wage price spiral.

Walking the tightrope

Royal mail's recent redundancy announcement and indeed Elon Musk's reduction
in the Twitter staff may well mean a striking workforce may find it hard to go
home and explain the wage rise they wanted has evaporated, along with any
wage at all, if redundancy looms. From Bank of England Governor Bailey's point
of view it gets over the point he's been trying so desperately to make in his
doom and gloom - higher wages will lead to a spiral of embedded inflation, so
please stop asking for them. It's a delicate tightrope we sit on, that the Bank of
England will push us into recession, by increasing interest rates, to defeat
inflation and jobs as a consequence will be lost. Time will tell, but if it is a
shallow recession they will be applauded for a soft landing. So far Bailey has
been reactionary, as he was at the FCA, and as a result too late to the party (we
wonder if Boris invited him!!) hence the extreme rhetoric.

We focus on interest rates and tend to forget the other tool used by central banks of Quantitative Easing. In simple terms, this is Central Banks buying Government bonds (in the UK called gilts) with the money used to buy them going into the economy to keep it going. This is a similar effect to cutting interest rates, and indeed once those interest rates are close to zero, is the only way to keep the economy going. The Bank of England has been buying gilts ever since the Financial Crisis in 2008 through Covid to 2021 totaling £875 billion, when the price of them was high. The opposite which we now are about to experience, is Quantitative Tightening in other words all these Government bonds are now going to be sold and so reduce the amount of money in the economy, as the Bank of England gets the money back. They have targeted £80 billion of sales a year. However, they will be sold when prices are low. It's a case of buy high, sell low! The irony of the Truss budget and the Bank of England buying £19 billion of gilts to help UK pension funds is the opposite. Because the budget was received so badly, gilt yields increased, so when bought by the Bank of England, will have been at a low and as rates have since fallen, so should be sitting on a profit. However, this is small fry and the overall expected loss on bond sales should be included in the Office for Budget Responsibility's forecasts when Chancellor Hunt unveils his Autumn budget next week, so something to watch for.

Savings Accounts

A consequence of the rise in interest rates is now better rates for your savings, so worth reviewing where your cash deposit funds are held. Instant access is around 2.5%, with 1 year fixed rate 4.6% and 2 year 4.85%. Ironically you get little more for a 5 year fixed rate. Source: Moneyfacts.

Banks make their money by charging borrowers more than what they give savers and so ideally, they prefer credit cards, where the gap, and hence their profits, are much bigger. Also, as interest rates rise, they can widen that gap, so higher interest rates are good for bank profits. But of course, there are always ways to get more and one of our pet hates is why they offer lower rates for cash ISAs than the equivalent non-ISA savings account. For example, the best 1 year fixed rate cash ISA is 3.85% - a gap of 0.75% over the best non ISA rate. Of course, the best rates are from different Banks/Building Societies so let's compare the rates offered from a leading Bank whose 1 year fixed rate non-ISA is 4.35% and equivalent ISA 3.65% - a difference of 0.7%, so not enough to take all the tax advantage from you, but certainly a sizeable chunk.

The message is to shop around and know your allowances. On this point, remember you each have a personal allowance i.e., an amount you can earn without paying income tax of £12,570. The key aspect to remember is that you have an additional personal savings allowance used against interest of £1,000 for a basic rate tax payer and £500 for a higher rate tax payer. For the 45% taxpayer it is zero. In addition is the starting rate for savings. If your non savings income is less than £17,570 you have an additional allowance of up to £5,000 that can be used against your interest and indeed Offshore Bond gains. Say one of you has State Pension as your only income, so currently £9,628, you'd have the balance of your personal allowance available of £2,942 + £1,000 personal savings allowance + £5,000 non savings income. A total of £8,942 that you can earn in interest, without tax. Let's take our Bank example of 4.35% means £205,563 can be saved, without tax, at the non ISA rate. If at their ISA rate, the £205,563 at 3.65% would generate £7,503. A difference of £1,439 kept by the bank!

Security

Unfortunately, one of our clients was recently scammed and indeed Charles recently fell foul of buying a small item off the internet without checking the reviews. If he had done so he'd have realised the item was never going to arrive. We are all busy and it's easy to take shortcuts (like Charles) or fall when someone catches you off guard.

We thought several aspects are important for you and your money. Whilst having mentioned the Banks negatively earlier, they do need praise for their publicity around scams and how to watch for them. A good service offered for free is from Which and worth signing up for, being their Scam alert service.

A question asked is if your computer is hacked how safe are your funds held with the likes of Standard Life (Abrdn). Can a hacker access Standard Life or us asking for your funds? We carry out the administration so any withdrawal instructions cannot be made directly by you to Standard Life, we do this on your behalf and indeed you'll know is always part of the overall planning and advice we give. We have experienced bogus e-mails purporting to be from a client asking for funds to be withdrawn. Where money is requested, only the two of us can give that authorisation and we will always check with you first. That verification responsibility lies with us.

Unipass Mailock

Email remains the most popular way for our clients to communicate with us but there are ever-increasing security concerns. We have adopted Mailock to secure any emails that we send to you containing personally identifiable information. We also take very seriously our duty of care to protect our client's data when we request that you send this type of documentation to us.

Our clients are all offered a free Mailock account which will enable them to send emails to us securely and protect their personal data. This free account allows you to reply securely to any confidential emails you receive from us. You will also be able to send up to five free secure emails per month to us or other recipients.

Adoption of the Mailock secure email system is a crucial step as part of our ongoing services, demonstrating our commitment to information security.

If you've already registered for a Mailock account because you have replied to secure emails in the past, you don't need to do anything.

To create your free Mailock account, it's easy. Simply click on this link and follow the instructions to set up your profile. You'll be able to send encrypted emails and documents (for example, a copy of your passport) that only the right people can open.