What November’s UK Inflation Report means for your finances

6 min Read Published: 17 Nov 2011

mervyn king Yesterday Sir Mervyn King,  the governor of the Bank of England (BOE), presented November's Quarterly Inflation Report. For anyone not in the world of finance, listening to an hour of Mervyn and his merry men drone on is enough to send you to sleep. But the report does have implications for everyone's finances, pensions, mortgages etc even if you never listen to it.

What is the Quarterly Inflation Report?

Once a quarter Mervyn sets out details of where the Bank of England (BOE) sees inflation heading in the future and makes projections on the future growth of the economy.

The key messages from the Quarterly Inflation Report in bullet points

  • The report's central forecast predicts inflation to fall far below the Bank’s 2 per cent inflation target towards the end of 2013. Inflation current sits at 5%
  • The Bank revised downwards its central forecast for growth next year. BOE now sees economic growth being below 1 per cent over the first half of next year, down from its 2.25 per cent forecast in the August inflation report
  • Economic conditions have deteriorated since the last Inflation Report in August
  • Sir Mervyn King claimed that some of the biggest risk to economic growth still come from the eurozone debt crisis
  • More money printing is likely - although this was not spelled out, it was not ruled out and given the pessimistic mood of the Report analysts are expecting the printing presses to be cranked up again soon

So what does all that mean for you?

Personal finances - Well the goods news is that inflation is anticipated to fall which in the short term will mean that your money will go that bit further.

Wages - The forecast of low economic growth in the near term remains a concern. A weakening economy is bad news all round, particularly given yesterday's appalling employment figures. Low growth and high unemployment are likely to keep a cap on any wage rises.

Mortgage and Savings rates - with inflation anticipated to fall and a stagnating economy interest rate rises are looking increasingly unlikely anytime soon. In fact markets are not expecting the BOE to increase the bank base rate until early 2014. But for the latest and best insight as to when interest rates will rise then read my Latest interest rate predictions.

So if the BOE keeps rates low mortgage borrowers with borrowing rates linked to the bank base rate will be breathing a sigh of relief. But savers, on the other hand, will be praying inflation falls as quickly as the BOE predicts otherwise the spending power of their savings is getting hammered.

More Quantitative Easing (QE), often referred to as money printing, is on the way.........which will mean....

Final Salary Pensions - If more QE does rear its head then the BOE will achieve this by buying gilts (government bonds). This excess demand will drive down the yield achievable on this type of investment (a quirk of its pricing). Given that the potential return achievable on gilts would likely fall in tandem with gilt yields, gilts being the investment cornerstone for defined benefit schemes to match future liabilities, if investment returns are hit then schemes could fall into funding deficit.

Annuity Rates - are based on long-term gilt yields. So when gilt rates fall so do annuity rates. If gilt yields fall due to another bout of QE that means people nearing retirement would receive less income than they would have when they buy an annuity with their defined contribution pension pot (i.e. a personal pension plan).

Investments - While risk assets (such as equities) rallied after the first QE efforts both here and in the US during 2010, markets have been pricing in the possibility of lots more money printing in the UK for some time. But whether we see an equity market rally will depend on the size of any future QE, both here and in the US (or even Europe).

Holders of 10 year gilts would, however, benefit from price rises as a result of more QE. In fact yesterday the price of 10 year gilts rose on the back of the expectation of more QE to come. On the flip side gilt yields would fall if we get more QE meaning the income return on gilts would fall. Or in other words, those already holding gilts may benefit from price rises while those looking to get into the market may see their returns hit.

Sterling - quite simply, pushing more money into the economy would mean the value of the pound in your pocket would be worth less. Obviously if this pattern persists then your holiday spending money could get a bit more expensive in future (but lots of factors affect currency fluctuations).

 

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