How do changes in interest rates, inflation and exchange rates impact on my portfolio?

Understanding how the major economic indicators work will make you better equipped to react to the big economic changes ahead

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Economic forces such as interest rates, inflation and exchange rates might seem complicated terms when you're a first-time investor, but how they work and relate to one another can have a huge impact on your portfolio. Of course, it's also important to pay attention to the cash flow and underlying investments of an individual company – or pooled fund – as well, but these 'macro' economic factors can have a significant effect.

Interest rates have been in sharp focus over the past few years, since the Bank of England base rate dropped to a record low of 0.5 per cent, where it has remained since March 2009. Interest rates are often the first metric many savers and investors will look at when deciding where and when to invest – a higher base rate means savers will benefit from higher interest rates, but borrowers pay more to borrow; while a lower base rate means interest rates fall and savers suffer, while borrowers benefit from cheaper loans. However, after six years at the low level of 0.5 per cent, there are stirrings that the base rate might be lifted at some point over the next year, thanks to growth in the economy.

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