Savers are braced for a prolonged period of interest rate increases, as the Bank of England has raised rates to combat runaway inflation. 

The central bank has announced a 0.25 percentage point increase in the Bank Rate, taking the rate to 0.75pc. This was the third rise in four months.

The American central bank, the Federal Reserve, has increased interest rates for the first time since the pandemic began yesterday and said it expected to raise rates six more times this year to rein in rising prices. 

How should households prepare for these repeated rate rises? There are ways savers can profit by switching to the best savings rates, investing in companies that can prosper as the cost of borrowing rises, and locking in cheap mortgage rates while they last.

The interest rate rise should be a prompt to review your finances, here’s what savers, investors and homeowners need to do now.

Switch to the best savings deals

Those with traditional savings accounts have suffered from prolonged low rates and most will have seen their wealth diminished by inflation over the past year. 

However, savers can limit some of the damage caused by the rising cost of living by moving their cash around. Most high street banks offer rates as low as 0.01pc on easy-access deals, but the average rate across all banks is 0.25pc. Banks have failed to pass on the full increase in the Bank Rate, with the average savings account rate increasing by just 0.05 percentage points since December. 

Fixed-rate savings accounts do not let savers make early withdrawals, so money stuck in an account with a low rate will not be accessible until the term ends. Given rates are expected to rise further, locking your money away at today’s rates may not be the best strategy.

Cash Isas are usually more flexible. While their rates are slightly lower than those from bonds, they normally allow early withdrawals, with a penalty. These penalties differ by provider but can typically be 90 days’ interest for a one-year deal. Longer deals usually carry larger penalties.

James Blower, of Savings Guru, a consultancy, said: “Theoretically you could make money by moving to a cash Isa deal with a better rate.” However, the rate offered by the better Isa in future would need to be sufficiently higher to offset the impact of the early withdrawal penalty. 

Invest in companies which stand to profit

Rates would have to rise significantly over the next year to match inflation, meaning that risking money on the stock market offers the best chance of keeping pace with rising prices.

Firms with strong pricing power and high profit margins, such as luxury goods or software brands that provide essential tools, will not be too badly affected by rising prices, experts said. Fundsmith Equity, the £26bn flagship strategy managed by star manager Terry Smith, has large positions include Microsoft and L’Oréal, the luxury cosmetics company.

Another popular fund is the £1.2bn Morgan Stanley Global Brands fund, which buys companies with loyal customers that will be willing to pay more for goods and services.

Some shares can even thrive as interest rates rise. British banks will be clear beneficiaries, according to David Henry, of wealth manager Quilter Cheviot. 

“Higher interest rates mean that banks’ profit margins will improve,” he said. “The difference between what banks are able to earn from loans and what they pay on products like savings accounts increases as interest rates rise.” 

Mr Henry said Barclays was his pick of the banks listed on London’s stock market. “Its valuation is not particularly demanding,” he said, pointing to a modest price-to-earnings multiple of six. The ratio measures how much a company’s shares cost relative to its profits. 

“Its investment bank has been performing well too, which gives it an edge that many other British retail banks do not have,” he added.