What a weaker sterling means for your money

Impacts on living costs, mortgage, holiday funds, savings, and investments

To understand the current economic climate, it is essential to assess the strength of the pound. You might have seen headlines about sterling falling against other currencies, particularly the US dollar. But what does this mean in real terms, and how does it affect your personal finances?

A falling pound, often called a weak pound, means your money doesn’t go as far when buying goods and services from abroad. Several factors contribute to this. Economic uncertainty, rising inflation, and the Bank of England’s interest rate decisions all play significant roles. When global investors lose confidence in the UK’s economic outlook, they may sell their pounds, which pushes the pound’s value down.

Impact of a weak pound on your everyday spending

The immediate effect of a weaker pound is on the cost of imported goods. Everything from car fuel to home technology and some foods can become more expensive. This is because it costs UK companies more to buy these items from international suppliers.

These rising costs are often passed on to you, the consumer. You might notice the price of your weekly shop going up or that filling your car with fuel is now more expensive than before. This is a direct consequence of the pound’s reduced purchasing power on the global market.

Impact of a weaker pound on your cost of living

A declining pound directly increases the cost of living. Since much of the UK’s energy is imported, a weaker pound results in higher bills for gas and electricity. This creates a ripple effect, as businesses also face increased energy costs, which can lead to higher prices for their products and services.

Furthermore, many everyday supermarket products are imported or include imported ingredients. From bananas to coffee, the price on the shelf reflects the cost of bringing these items into the country. When the pound is weak, import costs increase, and you will probably notice the difference at the checkout.

Homeowners face shifting rates

The Bank of England frequently responds to a weakening pound and rising inflation by increasing its base interest rate. The goal is to make borrowing more expensive, which can help slow the economy and keep inflation under control. If you have a variable-rate or tracker mortgage, your monthly payments will probably go up after a base rate rise.

For those on a fixed-rate mortgage, there is no immediate change. However, once your current deal ends, you may discover that the new rates available are considerably higher than what you are used to. This could lead to a significant increase in your monthly housing costs.

Getting less for your pound abroad

Planning a trip abroad? A weaker pound means your holiday money will not go as far. When you exchange your pounds for euros, dollars, or any other currency, you will receive less than you would when the pound was stronger. This makes every aspect of your holiday, from accommodation to meals and activities, more expensive.

For example, if the pound drops by 10% against the euro, a hotel room that would have cost you £100 will now effectively cost £110. It can be beneficial to compare exchange rates and consider all-inclusive packages with fixed upfront costs to better manage your budget.

Impact on your savings and investments

For savers, the outlook is mixed. Although rising interest rates aim to curb inflation, returns on standard savings accounts often fail to keep pace with the rising cost of living. This could mean the real value of your cash savings diminishes over time.

Conversely, a weak pound can benefit certain investments. Many companies listed on the London Stock Exchange earn a substantial part of their revenue abroad. When they convert these foreign profits into pounds, a weaker sterling boosts their earnings, potentially raising their share prices. This is particularly true for FTSE 100 companies.

Feeling unsure about your finances in the current economic climate?

Contact us for professional guidance and personalised advice on navigating these changes. We look forward to hearing from you.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.