Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest. 

THE UK, already caught in the grip of the cost-of-living crisis, has just witnessed the moment the painful squeeze on households tightened further still. The hefty half a percentage point rate rise, while unwelcome, was largely to be expected after the May data showed inflation is refusing to budge.

Today, a day after the May inflation shock came the 13th interest rate hike in a row - taking the Bank of England’s base to its highest level in 15 years - and bringing in the prospect of more misery for borrowers, homeowners and tenants alike.

There’s no denying this is tough going for consumers, but this is also a very tricky time for the British economy. The headline rate in May stayed stubbornly stuck at 8.7%, contrary to hopes of a fall - albeit a modest one. In fact, it actually worsened, with core inflation - the figure with energy and food prices stripped out - rising at the highest rate for over 30 years. In large part this is being driven by wage growth, currently running above 7% and threatening a wage-price spiral in which persistently high inflation drives higher pay demands and vice versa.

One thing for certain is that interest rates won’t come down until inflation is firmly on the way towards the 2% target and with inflation refusing to budge so far, that’s looking unlikely to be any time soon.

The stickiness of inflation, despite all these rate rises, prompts the question as to whether the Bank of England will eventually be reduced to having to force the UK into recession, in order to tame inflation.

For now, we can only hope this latest rate rise does the trick. In the meantime, investors need to stay on their toes.

1. Seek out opportunities

When interest rates rise and cash in the bank is actually quite a nice little earner, stock market investments tend to fall out of favour. However, with inflation still sky-high, to have any chance of countering its erosive effects over the longer-term investors tend to do better in the stock market.

Of course, stock market returns are not guaranteed, but by picking and choosing your investments carefully, we have seen, time and again, how you get your money working far harder by staying invested.

Knowing the right places to look for investment opportunities at a time like this is key. When consumer discretionary spending is tight, and the impact of raised interest rates on businesses will start to become even more evident, investors need to stay on the lookout for companies that have built-in resilience in an inflationary environment. Healthcare and consumer staples are obvious candidates. And take a look at companies that benefit from a stronger pound. Also look ahead to those sectors that could see a bounce as soon as the Bank of England signals the end of rate hikes, such as those potentially in the housebuilding sector, which could get a boost once mortgage rates stabilise.

2. Turn your attention to banking stocks themselves

While banks have never been as quick to pass on the benefits of rate rises to savers, the plus-side for investors is this does mean that the banks themselves have seen their profits soar as a result.

As always though, ensure you don’t put all your eggs in one basket. Make sure you are well-diversified, with holdings in different asset classes and across different geographies. Also make sure you’re not invested in too many funds, which can dilute your overall portfolio. A quick stock-check is a good idea at a time like this.

Use your annual ISA allowance and scour our Select 50 range of funds to find investments that will enable you to invest in high interest rate winners.

3. Stay invested

It’s very important to remain focused on your longer-term goals. As tempting as it may be, staying out of the market for even a short period of time, while you “wait for things to settle” can knock your financial plans off track. 

Similarly, resist the urge to try and “time the market”. Doing that requires you to sell at exactly the right time and then do the same again when you buy; a task you’re more likely to fluff than not. It’s a potentially costly game to play and that’s even before you factor in the trading costs. 

regular savings plan, which enables you to invest a set amount each month - and helps you avoid the temptation to try and time the market - can be set up from as little as £25 a month, up to the maximum ISA Allowance of £20,000 per tax year. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. Tax treatment depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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Ed Monk

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Fidelity International