As the Bank of England cuts interest rates for the first time in over four years, what are the implications for your investments?

The Bank of England did something this summer unseen since 19 March 2020: it cut the Bank rate. After nearly a year with the Bank rate stuck at 5.25%, investors are now pondering two new questions: how fast will rates fall and how far will they drop?

Shift in investor behaviour

The answer implied (not guaranteed) by the UK money markets is that the Bank rate will be 3.5% by the third quarter of 2027. Assuming no further global pandemics or escalating international incidents, UK interest rates look set on a downward path, which has several consequences for investors, including:

• New investors will see the return on fixed interest securities, such as government bonds, fall. This move is already underway, as investors buy to lock in current returns.
• Falling long-term bond yields go alongside a drop in annuity rates. If you are thinking about fixing all or part of your retirement income, delay could prove costly.
• Returns on cash deposits will drop as the Bank rate falls. Inertia is now a serious risk if you are sitting with cash on the investment sidelines. Wait too long before making your move into long-term assets and you could miss investment profits.
• Lower interest rates will benefit companies, particularly smaller companies which tend to have higher borrowing. In the US, which is at a similar stage in the interest rate cycle, there have been signs that investors are switching their attention from the mega companies towards smaller companies.

For advice on how you should approach an investment landscape of falling interest rates, talk to us soon – the longer you defer, the lower rates could drop.