The pound fell to a 14-month low this week with the cost of government borrowing hitting a new high – but what does this mean for your money?
Sterling dropped by 0.8% against the dollar to a low of $1.21 on Monday 13 January, the lowest it’s been since the start of November 2023. The UK currency has slid due to concerns surrounding Britain’s faltering economic performance and its long-term growth prospects.
Unless you’re about to head off on holiday and need to stock up on travel money, you might feel a bit detached from all the headlines about the pound plummeting, but it can have a major impact on your finances. Here, we explain why the falling pound makes life more expensive, and what you can do to protect yourself.
Why is the pound falling?
The pound has fallen due to worries that debt levels in the UK may be unsustainable. The cost of government borrowing has also risen due to these worries. The strong dollar has added to sterling’s woes, with investors turning to the greenback to protect themselves from uncertainty in the UK.
Nigel Green, CEO at deVere Group, said: “The combination of a robust dollar and a weakening pound is accelerating the capital flight from sterling. Investors are turning to safer currencies and assets, as the UK appears increasingly fragile in this turbulent environment.”
What does the weaker pound mean for me?
As mentioned, many of us only pay real attention to exchange rates when we go on holiday, but the weak pound affects our finances in lots of other ways:
Living costs
When the pound falls, it costs more for UK businesses to import goods and services denominated in dollars. Thanks to steep energy costs and soaring inflation, few companies will be in a position to absorb these extra costs, which are likely to be passed on to consumers.
That means we may end up paying more for fuel prices and everyday goods as transport costs go up, as well as imported goods.
It can therefore be a good idea to take steps to shore up your finances by trying to pay down debts and build a cash buffer for emergency spending. Experts generally recommend trying to put away three months’ salary, if not more.
Learn more about building a cash buffer in our guide How to build an emergency fund and find out ways to keep living costs down in our article How to save money – 19 best money saving tips.
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Mortgages
Despite bond market turbulence and the falling pound, slightly better than expected inflation numbers in the 12 months to December mean that many commentators still expect to see a base rate reduction as soon as February 2025.
This would be good news for those on variable rate mortgages who would see their monthly payments reduce.
However, even if rates are cut then, the base rate is expected to stay higher for longer, with fewer reductions than previously anticipated.
If you’re coming to the end of a fixed rate deal in the next few months, you’re likely to find that the rates on offer are higher than the rate you’re currently paying. It’s therefore really important to act now and see if you can secure your next deal before rates end. Most lenders will allow you to lock into your next rate between three or six months before your current mortgage deal finishes. Find out more in our guide Five good reasons to remortgage right now.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
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Holiday money
Holidays can be expensive enough, but when you’re having to deal with rotten exchange rates, this can really bump up the cost of your bills. It’s not just the dollar the pound has fallen against, you also won’t get much bang for your buck if you’re heading to Europe soon. This means you might have to rein back on eating out, or reduce the number of excursions you might have planned while you’re away.
Sarah Coles, personal finance analyst at Hargreaves Lansdown: “You can still make an enormous difference by shopping around for the best possible exchange rate. Whether you choose a current account or credit card with no overseas fees, or buy your currency in advance for a better deal, you can get far more for your money than if you exchange your money as a last-minute afterthought at the airport.”
Find out more about how to track down the best deals on your holiday money in our guide Travel money: where can I find the best exchange rates?
Savings
The falling pound is likely to mean inflation remains above the government’s 2% target for some time to come, which as mentioned should mean interest rates remain higher for longer. Although this should mean you can then earn better returns on your savings, the purchasing power of your cash continues to erode.
That means it’s really important to keep a close eye on returns and be ready to switch accounts if you find higher rates elsewhere.
Ms Coles said: “It’s more important than ever to shop around for the most competitive deal on your easy access savings. You should also consider whether it makes sense to fix money you won’t need for the next year or so for a period that makes sense for you – in return for a better rate.”
Investments
If you’re an investor and have international investments, and if sterling weakness continues, then any gains or income you make will be worth more when translated from dollars into pounds. The FTSE 100 index of Britain’s largest companies tends to benefit from a weak pound, because most big companies earn the majority of their money overseas, although depending on what happens in the days and weeks to come there’s a risk global investors might become increasingly spooked and start selling off British assets.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “Although higher gilt yields usually give support to the pound, the dollar’s strength is flexing even more muscle, and concerns about UK growth prospects are also weighing on sterling. However, the UK is overall expected to be more insulated from the effect of fresh US tariffs, given the majority of trade with America is in services, which may be exempt from higher duties.
“This may help sterling regain some ground, especially if bond markets calm further. For now, the weaker pound is providing a tailwind for the FTSE 100, given that multinational companies with overseas earnings, like mining stocks, benefit from the lower exchange rate. However, gains are being held back with retailers like M&S losing ground over concerns about the UK economic outlook.”
If you’re worried about the impact of the falling pound on your pension savings, it’s a good idea to review where your pension is invested and check that you’re on track to achieve the kind of retirement you want.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
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