What a weak pound means for your finances

While the pound has stabilised slightly since Liz Truss announced she was leaving her position as Prime Minister, it cannot be denied that sterling does not hold the purchasing power overseas that it once did.

At the time of writing, the pound bought US $1.11 or Eu 1.14. As a comparison, in 2000, it bought around 1.6 dollars and the same amount of euros.

Lack of trust in the UK government is the major reason for the most recent fall in the pound, although the dollar has strengthened against the euro too, because many economists are worried about how the whole eurozone will cope with the fuel crisis caused by the Ukraine war.

We notice the weakness in the pound when we go abroad on holiday and find that our money buys far less than it used to, but there are other ways in which the weaker pound affects our finances. Here are some of the main ones.

1. Goods become more expensive

We are already experiencing inflation, but the weaker the pound gets, the worse this is likely to be. A lot of the things we buy are imported, and even items made in Britain are often made with imported raw materials.

When the pound is weaker it costs us more of our pounds for imported goods, particularly if they are priced in dollars. That’s a particular problem for oil, which is always priced this way.

We also import more than half of our food, so expect supermarket prices to rise even higher.

2. Interest rates rise

If the pound is weak, then the Bank of England could raise interest rates to counter this. Raising rates means that those who buy sterling are given more reward for doing so, which could strengthen the value of the pound. It could also control inflation by dampening consumer demand for goods and services.

Higher rates are good for savers but bad for those with debts including mortgages, which are likely to rise. The Bank of England’s next scheduled interest rate decision is in November.

3. Some companies will do better

A weak pound is good news for companies that export goods or operate overseas because they receive money for those goods that is worth more in sterling terms.

Bigger companies that have more of their revenue from overseas tend to do particularly well at these types of points, which means that companies in the FTSE 100 tend to do better out of a weak pound than smaller, more locally focused, firms.

4. Holidays are pricier

When the pound is weak against other currencies, travelling to those countries becomes more expensive. When we exchange our pounds for local currency it does not go as far.

At present this is particularly a problem for countries that use the dollar, and those whose currencies are pegged to it. This includes the Bahamas and Barbados.

What we can do about the weak pound

While there are many things about the economy that we cannot control, there are some things we can do to help ourselves at this difficult time. They include:

Ensuring we get the best rates on savings

With interest rates higher than previously, cash savings can earn far more than previously, especially if you can tuck them away for a few years.

It’s more important than ever to make the most of your ISA allowance, as higher savings rates will mean paying more tax on our savings outside of ISAs and pensions. Higher rate taxpayers can earn £500 a year of interest before paying tax on it, and this adds up.

Paying off debts where possible

Mortgage rates are rising, so if you remortgage a fixed deal or are on a tracker, you will end up paying more. It may be worth seeing if you can overpay your mortgage so that you do not pay so much interest – especially if you are paying a higher mortgage rate than you could get on savings.

Many mortgage companies allow you to pay 10 per cent of your balance off without penalty, while you could also save money and pay it into your mortgage when you remortgage at the end of a term. Either way, this could have a long-term impact.

Thinking about investments

Some investments do better than others when the pound is weak. However, investing is a long-term game, and some UK businesses may also be good value now because they have fallen so far. Talk to your financial adviser about your portfolio and whether it is still suitable for your goals.

Changing our holiday plans

Most holiday destinations are more expensive due to our weak currency, but the pound has not fallen universally against all currencies. Turkey, for example, is still a cheaper option, while Bulgaria and Tunisia are other places where the pound has remained relatively strong.

Japan, although traditionally expensive, is another choice where the pound will still stretch, and is opening up again after the pandemic.

30th October 2022