Bank of England cuts interest rates - what does it mean for you?

Between December 2021 and August 2023, interest rates rose rapidly in response to soaring inflation. Now that rates have moved consistently in the opposite direction, what could that mean for you?

A reduction in the base rate typically results in banks and building societies lowering their interest rates on savings accounts and mortgages. Interest rates on other types of debt tend to also fall, while a change in the base rate can also trigger movement in the stock and bond markets.

After peaking in late 2024, savings rates have been gradually falling for several months. With the Bank Rate now at 3.75%, this trend may continue.

Banks and building societies have been reducing the interest they pay on easy-access and fixed-rate savings accounts. With inflation currently around 3%, it may become harder for cash savings to grow in real terms once inflation is taken into account.

If the rates on your accounts fall, you may be able to secure better returns on your cash by shopping around for a new savings account.

Using tax-efficient wrappers such as a Cash ISA could help protect interest from Income Tax.

For long-term goals, it may also be worth considering whether part of your cash savings could work harder in investments. Stocks and Shares ISAs, for example, offer tax-free growth and income potential, although investment values can fluctuate and you may get back less than you invest.

A base rate cut often means good news for borrowers, but the benefit you see will depend on the type of mortgage you hold.

• Fixed-rate mortgages: If you’re on a fixed deal, your payments won’t change until the end of your term. However, new fixed-rate deals may become slightly cheaper, which could help when it’s time to remortgage.
• Tracker mortgages: These move in line with the base rate, so you’re likely to see your rate and monthly repayments fall almost immediately.
• Variable-rate mortgages: These depend on your lender’s Standard Variable Rate (SVR), which often, but not always, tracks the base rate. Check with your lender to see how your rate might change.

Lower rates can also support property prices, as affordability improves. And for landlords, falling mortgage costs may boost rental income, but it’s wise to keep a close eye on tax implications and portfolio strategy.

A falling base rate can provide a lift to the stock market. There are several reasons for this:

If you’re already invested in the stock market, either directly or via a pension or ISA, your portfolio could benefit from this dynamic. However, as interest rates have already fallen significantly since 2024, market reactions may be more muted than during earlier stages of the easing cycle.

Markets also remain sensitive to inflation expectations and economic data, so it’s important to stay diversified and focused on your long-term goals. As always,  investments can go down as well as up, so you may not get back the full amount you invest.

Interest rate cuts affect bonds, particularly those already held in investment portfolios.

As new bonds are issued with lower yields, existing bonds with higher rates become more attractive. This can lead to a rise in bond prices, which may boost the value of fixed income holdings in your investment portfolio or pension fund.

If you run a business, falling interest rates may reduce your cost of borrowing, whether you’re financing a new project, managing cashflow, or looking to invest in growth.

Lower rates can also help support consumer confidence and spending, which may increase demand for your products or services.

However, it’s worth noting that the broader UK economic picture remains mixed, with underlying UK GDP growth still sluggish and signs of increasing slack in the labour market.

The Bank of England has been clear that while the direction of travel for interest rates appears downward, the pace of any further cuts will be gradual and data-dependent.

Inflation has eased to 3.2%, and the Bank now expects it to move closer to target during 2026, supported by slower wage growth and softer services inflation. However, policymakers remain alert to the risk that inflation expectations or wage pressures could prove more persistent.

With Bank Rate now closer to what may be considered a neutral level, future decisions are likely to be more finely balanced.

If you’re unsure how changing rates and inflation might impact your long-term plans, talking to a financial planner could help you stay on course and make informed decisions.