What interest rate forecasts tell us about the future of UK investing

The changing economic landscape can have significant repercussions for opportunities to grow our wealth. This means that interest rate forecasts could be essential in informing our investment decisions.

It’s been a challenging time for the UK economy, with inflation prompting the Bank of England (BoE) to begin hiking interest rates in late 2021 in a bid to prevent runaway consumer costs.

Owing to economic pressures in the post-pandemic landscape, inflation rates in the United Kingdom soared to 11.1% in October 2022, leading to further interest rate increases to bring rising prices back down to earth.

As a result, the BoE’s base rate peaked at 5.25%, representing a 16-year high. As inflation cooled, the Bank of England reverted to a more dovish fiscal stance and began lowering rates again beginning in 2024.

But what’s next for UK interest, and what will it mean for our investments? While there’s an expectation for more cuts throughout 2025, the economic landscape is constantly changing, and it’s worth avoiding assumptions at a time when geopolitical uncertainty is affecting global markets.

How Low Will Interest Rates Go?

In February, mortgage brokers told specialist lender Landbay that they expect just two more interest rate cuts from the BoE in 2025 due to higher-than-expected inflation data.

The reason inflation has such a strong impact on interest rates is that central banks are fearful of the effect of devaluation, which can make the cost of living outpace wage growth in a way that could prompt pay rises that accelerate inflation further and weaken the value of the GBP.

While mortgage brokers expect interest rates to fall to 4%, banks like Santander and Barclays are more optimistic, expecting rates to drop to 3.75% and 3.5% by the end of 2025, respectively.

Morgan Stanley analysts also expect UK interest rates to drop to 3.5% in 2025, while Goldman Sachs has been even more ambitious, forecasting a drop to 3.25% by June 2026.

Morgan Stanley and Goldman Sachs have offered more ambitious rate cut projections because the US banks believe the UK economy will face fresh challenges in 2025, prompting the Bank of England to undergo more aggressive cuts.

Despite investment banks forecasting lower interest rates by the end of 2025, seven in 10 mortgage brokers have different ideas. Based on a survey of 300 industry respondents, 69% believe that interest rates in the UK will be higher than the current level of 4.5% by January 2026.

Investing with Low-Interest Rates

Investors and economists view lower interest rates as growth-friendly and can benefit both personal and corporate borrowing. As a result, this paves the way for stronger profits, better consumer spending, and a more resilient economy.

With this in mind, lower interest rates are generally good news for equities investing, and it’s certainly worth looking into investing in stocks and shares as a means of securing growth.

Stocks and Shares ISAs can perform better in a time of lower interest rates because companies face fewer hurdles in expanding their profit margins and selling to consumers who can enjoy more spending power than in high interest-rate environments.

When interest rates are expected to fall, it can significantly impact strategies for holding bonds. Investing in longer-duration bonds can be more beneficial in these scenarios because they will become more valuable compared to newer bonds that are linked to lower interest rates.

What if Interest Rates Rise?

Higher interest rate environments can be a challenge for investors, who may have to deal with an adverse impact on economic growth throughout the United Kingdom. However, there are some opportunities that can be found by taking advantage of higher fixed-rate options.

While Stocks and Shares ISAs can be good for low interest rate environments, Cash ISAs can excel when it comes to navigating higher interest rates. This is because their fixed rates are generally linked to interest rates, meaning that investors can secure higher profits with little associated risk.

However, because interest rates can rise as a result of high inflation, you must ensure your provider’s AER is higher than inflation, otherwise, you could face losing out in real terms if GBP is depreciating at a faster rate than your Cash ISA is paying you.

High interest rates can also be good news for investors who like to buy bonds. Again, because they’re linked to interest rates, it’s possible to secure high-value bonds that can help to improve your earning potential over time in a more passive way.

Matching Your Financial Goals

While the best guess among banks is that interest rates will continue to steadily fall in 2025, you should be mindful to keep your financial goals in mind when looking at investments this year.

If you favour a more passive approach to investing, the comfort of fixed-rate Cash ISAs can remain the best option for your specific needs, while investors with a greater risk appetite may stay more faithful to Stocks and Shares ISAs.

The future remains uncertain when it comes to the UK’s economic outlook, but by staying in touch with interest rates and creating an investment strategy that suits your needs, you can stay on top of market movements while maximising your long-term profitability.

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