As central banks around the world, including the Federal Reserve in the U.S. and the Bank of England, consider adjusting their base interest rates, investors in the UK should pay close attention.
Base interest rates set by central banks play a crucial role in determining the cost of borrowing and the potential returns on savings and investments. When rates are lowered, borrowing becomes cheaper, which can stimulate economic activity but may reduce returns on savings and bonds. Conversely, higher rates can increase returns on low-risk assets like savings accounts and government bonds but make borrowing more expensive, potentially slowing down economic growth.
Understanding these shifts is essential for managing investments, especially in times of economic uncertainty and market volatility.
Federal Reserve set for a policy shift
As the Federal Reserve heads towards its September meeting, officials are preparing to begin lowering interest rates due to slowing economic growth and easing inflation.
Recent reports show that the economy is growing at a slower pace. The manufacturing sector continues to struggle, and consumer spending has also slowed down. A weaker-than-expected jobs report in the U.S. has raised concerns about the strength of the labour market, which has been a key driver of the economy until now.
Inflation, which was previously a major worry, has now dropped to 2.5%, close to the Federal Reserve’s target. This drop in inflation, along with signs of a weakening economy, is likely to lead the Fed to reduce interest rates.
The market expects the Federal Reserve to cut interest rates by 0.25% at the September meeting, although some experts think a bigger cut of 0.50% might be necessary.
Could interest rates come down globally?
In other parts of the world, both the Bank of England and the European Central Bank are expected to reduce interest rates in the coming months, which would provide much-needed support to their economies.
Financial markets have remained steady despite increased fluctuations. Government bond yields have dropped, reflecting expectations of rate cuts and highlighting the important role that bonds play in balancing out investment portfolios. The rise in market volatility highlights the need for diversification and careful management. Keeping a broad range of investments, including both stocks and bonds, can help reduce risks linked to economic slowdown.
While there are more signs of a slowing economy, there is also some room for cautious optimism. Lower inflation gives the Federal Reserve more flexibility to support economic growth. Company profits have improved over the past three quarters, thanks to stable profit margins and solid revenues. Strong corporate earnings are helping to support the broader economy and markets.
How should you prepare for changing interest rates?
The mistake many investors make is to assume "this time will be different" whenever there's a significant shift in markets.
By staying disciplined, using bonds for stability, and keeping a diversified range of investments, investors can build portfolios that can withstand market ups and downs while being well-positioned for long-term growth.
Could you need financial advice?
All investors should understand how their capital is at risk whenever they're invested.
If you're struggling to manage risk within your portfolio, you might be in need of financial advice. Fortunately, we're here to help.
Our team of expert advisers will tailor personalised solutions that target your financial goals, whilst working hard to manage the various risks associated with any investments.
If you're looking for truly independent financial advice, get in touch with us today.
This content has been adapted from marketing communications from our partners at Albermarle Street Partners.
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