### Future Interest Rates: Risks of Inflation and Economic Impact

Rising inflation risks could lead to increased interest rates, impacting both US and UK markets significantly.

### Potential Rise in Interest Rates: Implications for the US and UK Economies
* 📉 Interest rates have been declining, but there are emerging pressures that could lead to an **increase in inflation and interest rates** in the near future.
* 🇺🇸 In the US, the stock market's positive reaction to President Trump's election could indicate **potential economic growth**, driven by **deregulation and tax cuts**, reminiscent of the **Reagan era**.
* 🔥 However, this growth could lead to **overheating in the economy**, with risks of **increased inflation and subsequent interest rate hikes** from the Federal Reserve, which would negatively impact **bonds and risk assets**.
* 💼 Trump's policies, such as tariffs and tax cuts, are likely to be **inflationary**, as they can **raise consumer prices** and **stimulate economic activity**, potentially leading to **higher interest rates**.
* 🇬🇧 In the UK, rising US rates would likely influence UK yields, with the Bank of England predicting that the bank rate could **fall only to around 3.6%** by the end of 2027 in its central case.
* 📊 The Bank of England's scenarios suggest that if inflation remains **stubbornly high**, interest rates may need to stay **elevated longer**, driven by **persistent wage growth expectations** in the services sector.
* 🔍 Monitoring macroeconomic indicators is crucial, as the expectation of **continued high wage growth** could sustain inflation, impacting both **consumer prices** and **monetary policy decisions**.
* 🏠 For individuals, higher rates may affect savings and borrowing decisions, making it **essential to consider current market conditions** when refinancing mortgages or investing in bonds.

Interest rates have been falling, but what if these are the lowest that rates are going to get, and in fact, rates will rise from here? Currently, there are a number of emerging pressures that could cause inflation and interest rates to rise again. So in this video, we'll look

at reasons why that might happen, both in the US and in the UK. And if so, what should you do about it? And if you do like our content, don't forget to like this video and subscribe to our channel now. I'll start off talking about US

interest rates because generally when US rates rise, it pushes up rates elsewhere, including in the UK. So what are the reasons why US rates might rise? It's clear that the stock market reaction to President Trump's victory in the election in the US has been euphoric, and

for example, if we listen to what Kathy Wood says, who's a cheerleader for US growth stocks, she points to deregulation, government spending cuts, tax cuts, and a focus on technologically enabled innovation. And she thinks that could turbocharge growth in the US economy to

what we saw during Reagan's era. So why is that a problem? Well, the problem is actually one of overheating. Trump is coming into office with talk about stimulus, but in fact, the US economy is doing pretty well, certainly compared to other developed markets. So if you layer

on top another level of stimulus on an already okay economy, it could lead to overheating. So in this interview with Dan Iverson, CIO of Pimco, which manages $2 trillion of money and knows a lot about bonds, he says you've got to be careful

What you wish for, he said, there's some risk that some of this exuberance can work its way back into both inflationary expectations or actual inflation. Now remember that if there's inflation, the Federal Reserve would have to raise interest rates again, so this is really

not going to be good for bonds and potentially for us risk assets. And certainly looking at US valuations right now, they are in a state of euphoria with a forward price-to-earnings multiple of around 21 times. We're roughly where we

were at the post-pandemic euphoria and not too far off where we were with the dot-com bubble. So I'd certainly say that risk assets in America could suffer if inflation spikes and we get another round of higher interest rates from the Fed. Now we don't know what Trump's

policies will be in detail, but we know the broad outlines based on what he's said so far in speeches. And one of those policies is tariffs. Now the reason why that's inflationary is that the companies which are importing goods from abroad have to pay those

taxes that can often get passed on to consumers, and that increases prices. So this is directly inflationary for US citizens. Another policy which he'd like to implement is to cut taxes. Now that is also an inflationary choice. If you put more money in people's pockets and also

on corporate balance sheets, that tends to stimulate the economy and it's inflationary. Another policy is mass deportations of illegal immigrants. Now that could be a problem in particular industries like agriculture because you have to substitute other workers to do

the same job for more money. If this does lead to inflation, the greater worry I'd say is that at that point that Trump will blame the Fed because the Fed will be forced to raise interest rates to combat this higher inflation and that of course will cool down the economy plus

it could reduce stock prices, all of which Trump wouldn't like. If at that point he decides to step in and meddle with the Fed and reduce its independence, that could be a huge problem as seen by bond markets and it could well bring in the bond vigilantes which would sell us

treasuries and push up yields. Now each of these items on their own would push up US yields, particularly at the long end of the curve because yields there are driven by inflation expectations as well as growth expectations. So higher inflation means higher yields means a bond selloff and

if we combine all of the factors, we could be looking at a sizable increase in yield. Now if you're one of our premium website members, you get to monitor all sorts of macroeconomic variables which I'm discussing in this video for example, so let's take a look

at the macroeconomic tracker for example. You can monitor the US jobs market. You can look at non-farm payrolls or or if you're interested in buying bonds, we've got the UK yield curve and this is the shape of the yield curve including all

of the UK gilts. You can even look at what's priced into inflation-linked gilts to see what markets expect inflation will be in the years ahead and what's interesting here is that the 5-year, the 10-year and the 20-year break

yields are all above 3%, well above the Bank of England's target. So now let's turn to the UK. Now, apart from the fact that if US rates rise, UK yields would follow very likely. If you listen to what the Bank of England said in its November

2024 monetary policy report, their central case is that the bank rate will fall to around 3.6% by the end of 2027. So, even in their central case, we're not going to get rates falling a lot from where we are today. But as I say, that's just their

central case. The Bank of England's current framework is to consider three scenarios. Think of them as how severe monetary policy will be. Scenario one, at the top, I'd characterize as we did it essentially. Inflation is now quashed and there's not going to be a lot more pain

and rates can come down quite soon. In fact, we've already started cutting rates in the UK. Scenario two is that central case where a little bit of pain is going to be required to finish the job and get inflation back to 2%. Scenario three

however, is the one I'll focus on, which is the much more problematic case where inflation is very sticky indeed and requires rates to remain high for a long period of time or potentially be raised from where they are today. The reason behind that stickiness is psychological because businesses and

people expect their wages to stay high. They want their income to stay high in order to compensate for losses which they've made during the period of high inflation. In fact, people now have anchored at a higher rate of wage growth or income growth. If they

companies that in turn could be very inflationary and it'll take a prolonged period of high rates in order to reverse that psychological change, that structural change as the Bank of England calls it. Now there's evidence for this stickiness in the monetary policy report.

such as this graph which shows the frequency of price changes during a period of high inflation. It's often these frequency of changes which matters more than their magnitude, so the blue line here is service inflation and remember that most of the UK economy is driven by services and certainly if you

break it down item by item and look at the frequency of increase of prices, then you can see services inflation still remains very high and the amount of disinflation, which is how much the rate of inflation is falling, is fairly limited so far. So that certainly looks

sticky to me. Now this is the decision maker panel survey, or DMP survey, where the Bank of England asked chief financial officers from small, medium and large UK businesses about what they think about the economy and here's their view about wage growth. Now for the

overall survey, you can see that the expectations are for 4% wage growth, which isn't too far above the Bank of England's target 2% inflation, but look at the consumer-facing services sector. There the expectation is that wage growth is going to be in the region of 4

and 3/4% - that's way above what you'd expect for companies which produce goods where it's only 3 and 3/4% wage growth. So this is a forward-looking measure I'd say of services inflation. If wages are

growing that feeds through to higher services inflation and that could keep inflation higher for much longer in line with the third scenario from the Bank of England. The bank also notes that the increase in National Insurance contributions from companies may also affect wage growth, in other words push

it upwards. And if we look at the effect of that budget on inflation according to the Office for Budget Responsibility, they also forecast that it'll push up inflation in the midterm, not hugely, but certainly by a significant amount. So you can see that all of these factors point

to services inflation remaining sticky as it has been so far. If you split UK inflation into services and goods, goods are already in deflation, prices are falling year on year whereas for services we're still seeing very rapid growth in prices. And if wage growth in

the services sector stays high, then inflation's likely to stay high as well. Now, of course, this is not taking into account another spike in energy prices due to geopolitical instability, that's always a risk, of course. Now you saw our trackers previously, which allow you to

monitor macroeconomic variables. We're also really excited to announce the launch of our PensionCraft tools app which allows you to take an investment strategy and back test it. Furthermore, you can also simulate the future with Monte Carlo simulation. Now all of our premium website members get access to

that app, and we haven't increased the cost of our subscription since 2021, but we will be raising it in the new year. So if you want to lock in that low subscription rate and get access to our trackers, our app and of course our chat application so you can ask, ask a

question whenever you want just go to our website pensioncraft dot com learn more so what would a higher rate mean for you well it really depends whether you're a saver or a borrower if you're a saver then maybe you want to keep your money in money markets right

now and that's because bank rate is unlikely to fall by much and it may start to increase again by delaying your switch into gilts and extending your duration later you may be able to buy bonds at higher yields than you'd get them today on the other hand if you're a

UK borrower then perhaps you don't want to delay refinancing your mortgage if you think rates are going to be increasing in the near future or if you're a first-time buyer you wouldn't put off buying a house waiting for interest rates to come down because if

they're going to go up there's no benefit in delaying now this isn't a forecast of course I don't make those but I hope I've given you some ideas about why the conventional thinking currently is that rates will fall but in fact I'd say there are some fairly

likely paths to rates increasing over the medium term and that would affect markets it would affect fixed income it would affect equity and it could affect your choices about whether to buy a house or refinance your mortgage now don't forget if you do decide to join

our community you will be able to do that at a currently low price not inflation adjusted and you can learn more about that by going to our website pensioncraft dot com membership and that way you can avoid any price increases which we introduce in the new year and as always

Interest Rates Set To Rise?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

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Potential Rise in US Interest Rates and its Global Impact

Falling interest rates might reverse, leading to inflation and rising rates.

US rate increases generally affect global rates, including the UK.

Positive stock market reaction to President Trump's election and potential economic stimulus.

Concerns about economic overheating due to stimulus layered on an already strong economy.

Expert opinion highlighting risks of inflation and the Federal Reserve's response.

Analysis of Trump's policies (tariffs, tax cuts, deportations) and their inflationary potential.

Analysis of UK Interest Rates and Inflationary Pressures

Bank of England's prediction of interest rate fall to 3.6% by 2027.

Discussion of three scenarios for monetary policy severity by the Bank of England.

Focus on the problematic scenario of sticky inflation requiring prolonged high rates.

Evidence of sticky inflation in services sector, based on price change frequency.

Analysis of wage growth expectations from the DMP survey, highlighting high expectations in consumer-facing services.

Impact of increased National Insurance contributions on wage growth and inflation.

Implications of Higher Interest Rates for Savers and Borrowers

Advice for savers to consider money markets due to potential rate increases.

Advice for borrowers to consider refinancing mortgages promptly if rates are expected to rise.

Advice for first-time homebuyers not to delay purchasing due to potential rate increases.