Rising inflation has contributed to higher prices for fuel, food and energy in the UK economy as well as within the eurozone. The current level of inflation in the UK is the highest it’s been in thirty years at 7%. Cost-push inflation has been one of the main factors, as supply chain and production costs have increased within global markets.
This has also had an effect on overseas purchases for investors and businesses who are looking to spend or transfer cash. As costs for goods and services continue to rise, it’s important to budget your expenses and plan your foreign currency transfers in advance.
Rising inflation causes price fluctuations
Decreasing purchasing power
Due to current increases in prices for goods and services, consumers would have seen their purchasing power diminish. Particularly, rising costs in fuel and energy prices have contributed to the increased cost of living within the UK. Additionally, the current trend has also caused higher prices for fuel and energy within the eurozone. Ultimately this means less affordability and lower purchasing power for the average consumer.
During an economic downturn, it can be beneficial to invest in overseas assets such as property. Although rising inflation has also been seen in Europe, there is still demand within countries such as Spain and Portugal for overseas property purchases.
Higher prices for goods and services
The Ukraine and Russia conflict has contributed to the continued price rises within goods and services within Europe. According to Reuters, investors are predicting interest rates to be set at 2% by The Bank of England (BoE) at the end of 2022. As a result, finding ways to diversify your investment portfolio and lower personal debt is key.
When prices rise globally, one of the key areas this impacts is import and export within economies. This usually creates higher tariffs and potential fees to import goods from neighbouring or international countries. Although consumer demand has remained relatively strong in major economies, supply chain issues remain at the moment.
Exchange rate fluctuations
The devaluation of a country’s currency can have a huge impact on the daily life of a country’s citizens. This is due to the value of a currency having a direct effect on a nation’s economic performance. A weak domestic currency encourages economic growth by boosting exports and increasing the price for imports. This then forces consumers to buy domestic goods.
For businesses who predominantly work with foreign suppliers, inflation can cause limited supply and increase labour costs for workers. When planning to purchase or produce products overseas, it’s important to take into account the current exchange rate. With market movements taking place frequently, it can be beneficial to set up rate alerts to be notified when your preferred exchange rate is reached.
What higher interest rates means for consumers and businesses
Lower spending within the economy by consumers
With increasing interest rates and inflation, consumers have less purchasing power. This is due to higher interest rates which will increase loan repayments, such as mortgages. Consequently, consumers will need to priotise paying off increasing debt before spending on luxuries.
Additionally, since interest rates and inflation are interlinked, average consumers will not have as much disposable income. This also correlates to price rises for goods and services by businesses. Depending on the industry, businesses would likely have to pay additional costs to suppliers due to limited supply. As interest rates and inflation continue to rise, average consumers will be squeezed financially.
Increased fees for borrowing money
According to the Financial Times, markets now expect the BoE to increase interest rates to at least 1% by May and 1.5% by November 2022. The current bank rate set by the BoE is 0.75%. The rate affects all areas of the UK economy, including the cost of mortgages and loans and how much savers get paid for bank deposits.
A rise in interest rates negatively impacts small and medium sized enterprises who see additional costs to borrow capital. It’s also difficult for SMEs to maintain a positive cash flow during an economic downturn. Usually in order to do this, companies will need to increase their price offering. The additional cost would then be passed onto the consumer.
The importance of safeguarding your investments
Having a risk management strategy
When investing your finances overseas to purchase property or company equipment, it’s important to have a risk management strategy in place. As market movements are unpredictable, it’s not possible to know the perfect timing to make a currency transfer.
As a result, a forward contract could be a perfect currency risk management tool. You can arrange to transfer currency for an agreed future date (up to 12 months ahead) at today’s exchange rate, allowing you to stay on top of your budget.
Holding foreign currency reserves
During economic uncertainty, cash flow is extremely vital for businesses. If you’re a global business or work with overseas suppliers, it would be worth holding or transferring foreign currency. This is due to the exchange rate fluctuations which can influence the current pricing of imported goods and services.
For companies or investors based out of the UK with a business venture overseas, transacting using Euros or US Dollar can also save both time and provide convenience.
Choosing a foreign exchange service
When making an overseas property purchase, it’s likely you’ll need to pay in the local currency. The majority of UK high street banks allow you to make payments in currencies other than pound sterling. Nonetheless, most banks will charge high conversion fees, which will quickly add up when you’re transferring a large amount of cash.
Even if they don’t charge these fees, their exchange rates are not likely to be good. To avoid this, it’s best to use a foreign exchange platform such as CurrencyTransfer for better rates and quality of service.
How can CurrencyTransfer help you?
As inflation continues to rise, finding ways to safeguard your current or future investments is imperative. Here at CurrencyTransfer we ensure that both individuals and businesses can optimise their money transfers in advance. Our dedicated relationship management team has expertise to assist with both business and personal accounts.
Once you open an account and get it activated, keeping both your money and data secure for international transfers is our top priority. At CurrencyTransfer, we provide a tailored customer experience and aim to support you in all aspects of your business.