Inflation and interest rates can affect lots of different areas of your finances. This has been especially apparent over the past two years, as global inflation rose.
But what could happen next for economies and stock markets around the world? Inflation seems to be cooling, yet interest rates remain high despite many predicting that they could start to fall in the coming months.
Read on to learn more about how interest rates around the world could change in 2024 and what it could mean for you.
Central banks around the world have increased interest rates in response to rising inflation since 2022
Interest rates have risen in many major economies over the past two years as central banks responded to soaring inflation. Higher interest rates make borrowing more expensive, which often encourages the population to save more than they spend. Consequently, demand for goods and services falls, usually leading to lower prices.
In Singapore, monetary policy works slightly differently because the exchange rate has a much more significant effect on inflation than interest rates due to the way it trades with other countries. So, rather than tweaking domestic interest rates, the Monetary Authority of Singapore (MAS) focuses on strengthening or weakening the exchange rate of its dollar.
A stronger Singapore dollar means that it will be cheaper to import goods, which can lead to lower prices for consumers.
Many major economies are now experiencing disinflation, so interest rate cuts could be imminent
In recent months, inflation has begun to cool significantly, particularly in the US, eurozone, and UK, leading many to expect that interest rates could soon fall, too.
In the US, inflation has been falling for quite some time. Morningstar reports that the Personal Consumption Expenditures Price Index (PCE) – the Federal Reserve’s preferred gauge of inflation – peaked at 7.1% year-on-year in June 2022, falling to 2.3% in January 2024.
Despite the positive news that inflation is falling, the Federal Reserve committee has held rates at a 20-year high of 5.25% to 5.5% since summer 2023. CNBC reports that the central bank is likely to do so until the committee sees more data confirming that inflation is continuing to fall to within its target range. The committee has suggested that this could happen this summer.
In Singapore, inflation appeared to peak at 5.5% in January 2023, and as of January 2024 had fallen to 2.9%. However, at its most recent meeting in January, CNBC reports that the MAS also held rates steady. Its next meeting will be at the end of April, so the committee may decide to change the rate then if data suggests this is sensible.
3 ways the current economic landscape could affect your wealth
Here are a few ways that falling inflation and interest rates could affect you this year.
1. Uncertainty can create market volatility
Though inflation does seem to be falling for most major economies, there’s no way to be certain of when interest rates might fall.
Uncertainty like this can create volatility on the stock market. It can be nerve-wracking to see this happening, but keep in mind that fluctuations are a normal part of investing on the stock market.
Another important point that can be reassuring is that the stock market is not the economy – even if a country is experiencing economic difficulties, it doesn’t necessarily mean that will translate into lower returns. It’s impossible to predict with certainty how stock markets might perform from one month to the next.
2. Rate cuts can create optimism on the stock market
When rates fall, borrowing becomes more affordable, which means businesses are able to fund growth, recruitment, and other initiatives. This can lead to greater profits, and consequently, higher returns on the stock market.
So, if rates do fall this year in the US, UK, or elsewhere, it could provide a boost to your portfolio.
It’s important to note that this isn’t guaranteed, but it is a possible outcome.
3. Cash savings could lose buying power as prices continue to rise
Prices will continue to rise, albeit more slowly during disinflation. This means that the buying power of your cash savings is likely to fall in real terms.
Though it’s sensible to hold some of your wealth in cash, to help cover emergency bills or other short-term costs for example, your financial planner can help you to decide how much is right for you.
Get in touch
If you’re concerned about how economic conditions could affect your wealth, we can help to reassure you and find the most sensible course of action to protect your finances.
Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.
