Interest rate cuts – what it means for markets and investors

Last week we saw the Bank of England (BoE) vote to cut the UK base rate from 4.5% to 4.25%.

The decision to cut by 0.25 percentage points follows a reduction in February when it was cut from 4.75% where it had been since November 2024.

Further rate reductions are expected – many expect at least three more rate cuts in 2025 now that inflationary pressures have eased. While it remains above the Bank’s 2% target, the latest data revealed that inflation was 2.6% in March, down from 2.8% in February.

A change in interest rates impacts our finances and the world of investments, as well as the economy. Here are some of the key things you need to know about when interest rates fall:

What the rate cut means for finances

Lower interest rates means it’s cheaper for individuals and for companies to borrow money. This can benefit mortgage holders and those taking out loans, as well as businesses who want to gain access to capital to grow without it costing them too much.

On the flip side, savers with money in cash savings accounts will likely see the interest offered on deposits fall. Savers with money in fixed rate accounts will have some protection from falling interest rates, but when those fixed terms end, the rates on new deals will be lower.

What does it mean for investors?

For investors, stock markets are forward looking which means some rate cuts have already been priced in so we might not see any impact on share prices from this news.

Falling interest rates impacts bond markets in a different way. All things being equal, when interest rates fall, bond prices rise – the bonds become more valuable. Why? Well, it is because future bonds will likely be issued with lower coupons (the fixed rate of income on a bond). As a result, existing investors may look to buy into bonds that are already in the market to optimise their returns as the coupons on offer become more appealing. That extra demand drives up bond prices making them more valuable but also more expensive to buy.

Is it time for savers to consider investing?

Rate cuts can encourage savers to get their money invested rather than suffer the prospect of low returns on their money. With more rate cuts expected this year, we have likely passed the peak savings rates on offer and they will be gradually falling if the Bank of England continues to reduce further.

Investing offers the chance to beat returns from cash – and historically it does, over the long term.

How investing can help you beat cash returns

Figures show that depositing £10,000 in our Barclays Everyday Saver Account compared to investing in one of our five Ready-made Investment funds would result in a smaller return, over the five-year period from January 2019 to end of December 2024.

In a Barclay’s Everyday Saver Account (a savings account), that £10,000 would have grown to just £10,302 after five years.

Yet if it had instead been invested in the Barclays Ready-made Investment Defensive you would have £10,856, or in Ready-made Investment Cautious you would have £11,716. Selecting the Ready-made Investment Balanced would have resulted in a pot of £13,022, and for those willing to take the higher risk funds, the Ready-made Investment Growth would have boosted it to £14,095 and had you chosen the Ready-made Investment Adventurous you would have £15,095.

It’s worth remembering that there is tax to pay on any savings interest income over £1,000 if you’re a basic rate taxpayer, and £500 if you’re a higher rate taxpayer. If you pay income tax at the additional rate you pay tax on all your savings interest.

Meanwhile, any investments held in an ISA are free of tax on any capital gains or income.

What our experts say

Will Hobbs, Head of Multi-Asset Wealth at Barclays Private Bank and Wealth Management, explained: “We expect more rate cuts to come from the Bank of England, taking us towards what is considered a more normal level. Yet no matter what rates are doing, getting invested and staying invested remains the core mantra for long-term investors.”

Clare Francis, Savings and Investments Director at Barclays Smart Investor, says: “Lower interest rates are likely to lead to a reduction in savings rates. It’s important to keep some money in cash in case of emergencies, but if you’re looking for a new home for some of your savings, without taking too much risk, there are investments which should generate a better return than cash, while sitting at the lower end of the investment risk scale.

“Options include investing in UK government bonds, known as gilts – you can either do this by buying gilts directly, or you could invest via a bond fund. Money Market funds are another option. Or you might want to consider one of the lower risk Ready-made Investment funds available on Smart Investor.”

Getting invested

If you decide you want to start investing, or to boost your existing investment coffers, then remember the key investment strategies that could help you:

Be diversified

Investing across different sectors, asset classes and geographical areas can protect your savings. This approach means that if one or more of your investments rise, you will benefit, but, if they fall, there should be some protection because, hopefully, some of your other holdings in different asset classes, regions or sectors will be going up in value.

Invest regularly

Regular investing is a popular strategy that means you don’t need to worry about the best time to invest, according to what markets are doing. By drip feeding your money into an investment over time, you invest across a range of prices. This effectively means you pay an average price over a fixed period, which can help smooth out market volatility.

Your buying power increases when the share price falls as you can buy more shares at cheaper prices. That same buying power drops when prices rise when you buy shares and funds when they are expensive and buy fewer shares. This is known as ‘pound cost averaging’.

Benefit from compound growth

Investing over the long-term allows you to benefit from the power of compound growth. In simple terms, your money earns a return in the first year. As long as it is reinvested, in the second year both the original investment and the return benefit from any growth in the second year. In the third year your investment is further enhanced by any reinvested returns achieved. This snowball effect is called compound growth.

Maximise tax perks

Maximising ISA and pension allowances mean you pay less tax and so your money can grow faster.

Each April investors are given a fresh ISA allowance which allows you to shelter up to £20,000 from tax.

You can also contribute up to £60,000 a year into a pension (or up to 100% of your annual salary, whichever is lower).

Not everyone has a lump sum they want to invest, so a regular amount makes sure you utilise as much of the tax breaks as you can afford.