What a weaker pound could mean for your wealth

After the pound fell swiftly at the end of September, read about what a weaker pound could mean for your wealth in the coming months, and how we can help.

Following former chancellor Kwasi Kwarteng’s autumn mini-Budget announcement in September, the value of the pound fell rapidly.

In his statement, Kwarteng announced a range of tax cuts, including the abolition of the additional-rate tax band and a 1% cut to basic-rate Income Tax, both of which have since been reversed.

According to the Guardian, the pound reached an “all-time low against the dollar” when markets opened on Monday 26 September.

The pound has recovered incrementally since Kwarteng’s mini-Budget announcement in September 2022

Since the mini-Budget, the pound has rebounded somewhat.

As of 18 October 2022, sterling stood at $1.13 – just three cents off its value a month earlier. However, a sterling value of $1.13 is still historically low; this rate has not been seen since 1985. On 5 October 2021, sterling was valued at $1.36.

The pound’s incremental recovery could be down to a series of political events that followed the mini-Budget announcement, including:

  • Kwarteng’s reversal of his decision to abolish additional-rate tax
  • Liz Truss’s sacking of Kwarteng and replacing him with a new chancellor, Jeremy Hunt, on 14 October
  • Hunt’s snap statement on Monday 17 October, which reversed more of Kwarteng’s announcements, including his decision to cut basic-rate Income Tax and scrap the planned Corporation Tax rise.

In addition, the Bank of England (BoE) intervened by pledging to buy £5 billion in UK gilt bonds every day until 14 October, Reuters reports.

So, you could be wondering: “are we out of the woods? Do I need to worry about my investments and travel plans in the near future?”

The truth is, while there is no need to panic, the markets could continue to experience volatility in the coming weeks and months.

Indeed, following the mini-Budget, Kwarteng promised to unveil a new “debt-cutting plan” on 31 October, according to the Guardian, prompting curiosity among consumers and investors. These plans will now be announced by the new chancellor, Jeremy Hunt.

So, while the pound has successfully regained some value since the announcements, further shake-ups to fiscal policy could create instability in future.

Here’s how a weaker pound could affect your finances in the coming months.

A low pound could increase your travel expenses

If you are planning to take advantage of post-pandemic travel freedom soon, a weaker pound could make your holidays more expensive.

When travelling abroad this year, you could notice you are paying more in sterling for the currency you need. Sterling has performed poorly in recent months against many currencies, including the euro, which could affect your travel plans directly.

So, it may be wise to over-budget for any upcoming travel plans you have in case further volatility causes the pound to fall again.

Similarly, if you run a business, overseas travel could increase your overheads in a time of already-high costs. In this instance, it might be useful to consider cutting down on travel where possible, to shore up your company’s wealth against rising travel costs in the near future.

Imported products could become more expensive, leading to further economic volatility

If you are a business owner, you may be worried about how importation costs will be affected by a weaker pound. It could be constructive to discuss the impact a weak pound could have on your SME with your Kellands financial planner.

What’s more, in addition to business owners, consumers could bear the weight of sterling’s fall in value. The UK imports around 40% of its food, according to a government report published in 2020 – meaning grocery prices and eating out could become more expensive if the pound remains weak.

Plus, UK fuel prices – which have already seen a significant uptick so far in 2022 – could increase as a result of a drop in the value of sterling.

Interest and inflation could be pushed up by a weak pound

As the pound falls, the high cost of imported goods could have an impact on interest rates.

If climbing costs are reflected in the Consumer Price Index (CPI) rate of inflation, the Bank of England (BoE) could continue raising interest, after a series of hikes already implemented so far this year.

Indeed, since Kwarteng’s announcement, two-year fixed mortgage rates have surpassed 6% for the first time since 2008, the Guardian reports.

If the pound remains weak, and costs rise, the BoE could opt to increase interest rates even more sharply than before, causing concern for borrowers up and down the UK.

Your investments could experience a downturn

If you check in on your investment portfolio regularly, you may already have noticed the value of your assets sink in recent months.

Indeed, market volatility sparked by the Russian invasion of Ukraine, high inflation, and political upheaval in the UK may already have affected your portfolio.

Now, the events that unfolded since the mini-Budget announcement have proved worrying to investors, many of whom have sold off UK assets, causing a further downswing.

Nevertheless, it is important to note that markets usually rebound. So, if your assets’ values have fallen sharply in recent months, remember that now is not necessarily the time to panic-sell.

In fact, it may be beneficial to discuss investment opportunities with your financial planner while sterling remains low. It could be that, if you use the weak pound as a buying opportunity, your portfolio could yield significant profits when markets rebound. By staying confident and buying up assets while their value is low, you could reap the rewards in the coming years.

While past performance is not a reliable indicator of future performance, and the value of your investment can go down as well as up, now could be a great time to discuss expanding your portfolio with your Kellands financial planner.

Get in touch

If you have any questions about how a weak pound could affect your money, speak to us today. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Written by Madeleine Goode

Please note

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.

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