UK Interest Rate Cuts: What They Could Mean for Investors in 2025 and Beyond

Download IPFS

The Bank of England (BoE) is expected to continue lowering interest rates through the second half of 2025, prompting investors to consider whether their current strategies are still fit for purpose. As the UK base rate trends downward, this could mark a significant shift in the investment landscape, especially for savers relying on fixed-rate returns.

The BoE began raising rates in late 2021 in response to rising inflation, but began reversing course with its first cut in August 2024. Since then, the base rate has fallen from 5.25% to 4.25%, following four consecutive cuts, the most recent of which occurred in May 2025. With inflation still hovering around 3.6%, well above the BoE’s 2% target, experts believe only modest cuts of no more than 0.25 percentage points at a time are likely in the near term.

Nonetheless, several financial institutions have published projections suggesting further cuts this year. ING forecasts two more rate reductions in August and November, potentially lowering the base rate to 3.75%. Deutsche Bank sees a steeper path, expecting rates to fall to 3.5% by year-end. Meanwhile, Pantheon Macroeconomics takes a more cautious view, predicting just one additional cut before the close of 2025.

Looking further ahead, Oxford Economics projects the BoE base rate to fall to 2.5% by 2027, where it is expected to remain relatively stable through at least 2029. These projections could have a substantial impact on how UK households and investors allocate their funds over the coming years.

A key concern for savers is the impact of falling interest rates on Cash Individual Savings Accounts (ISAs). These products are directly influenced by the BoE base rate, meaning lower rates translate into diminished returns. If those returns fall below inflation, savers could see their real-term value erode. Despite this, Cash ISAs remain far more popular than Stocks and Shares ISAs 18 million people hold the former, compared to just 7.8 million with the latter.

However, with financial markets delivering strong returns in recent years, the average annual return for a Stocks and Shares ISA over the past decade stands at 9.6%, compared to just 1.2% for Cash ISAs. This contrast suggests that investors willing to accept some market risk could potentially earn more over time.

For those prepared to take a long-term view, Stocks and Shares ISAs offer an alternative to low-yield savings accounts. This strategy is particularly relevant during periods of political or economic uncertainty, such as the current trade tensions influenced by the United States’ policy changes under President Trump’s leadership. Long-term investing helps insulate portfolios from short-term market volatility while keeping investors focused on broader financial goals.

Bonds, too, are influenced by changes in the BoE base rate. As fixed-income instruments, their value and yield tend to respond inversely to interest rate movements. While low-rate environments can reduce the interest payouts on new bond purchases, bonds still play a valuable role in a diversified investment portfolio. This is particularly true for government bonds, which are often used to hedge against stock market risk. High-yield corporate bonds remain an option, though they typically come with a higher risk due to the lower credit quality of the issuing companies.

Ultimately, whether one is a saver or an investor, shifts in the UK’s base interest rate should prompt a reassessment of financial strategies. Ignoring these changes could mean missed opportunities or worse, negative real returns. Staying proactive, understanding the relationship between rates and returns, and adapting according to one’s risk tolerance are all critical steps in managing wealth effectively in a changing interest rate environment.

As the BoE signals a continued easing trajectory through 2025 and potentially into the latter part of the decade, UK investors would be well served to evaluate their exposure, consider long-term investment vehicles, and prepare for a financial landscape where low interest rates may persist.