A big sigh of relief will greet the Bank of England’s latest base interest rate cut given how long painful borrowing costs have lingered.
But the move and the outlook from the Bank underlines the challenges facing the UK.
The risks of stagflation are stark.
Inflation is still above the 2% target and price pressures are piling up, but the economy is stagnating, and business confidence has taken a knock.
The Bank has revised down its expectations for growth this year, which keeps the door wide open for multiple rate cuts to come.
Financial markets are now expecting at least two, maybe three, further interest rate cuts this year, with the base rate likely to drop below 4% by the end of 2025.
The speed will depend on how the economy responds in the months to come.
Businesses in the services sector are already feeling the pain of upcoming changes to National Insurance contributions, as suppliers start to pass on the costs of higher expected wage bills.
How all this will land in terms of consumer prices and demand for goods and services in the economy isn’t clear yet.
The threat of Trump’s tariffs also clouds the picture.
While the UK could potentially benefit if trade flows shift and investors seek ‘safer’ tariff-free havens, a knock to global trade could stunt growth.
It means policymakers might well pause for thought in March, with a further cut looking more likely in May or June.
This article isn’t personal advice. Ask for advice if you’re not sure what’s right for you.
What does the cut mean for savings rates?
This rate cut was all-but nailed on.
The savings market hadn’t just counted its chickens, it had roasted and sold them – pricing the rate cut firmly into fixed rate deals.
It means the fixed-term market is unlikely to move far for now.
Meanwhile, for those banks that gamely held onto easy-access rates well above 4.50%, this could be the catalyst for some cuts.
It could blow some of the froth off the easy-access Cash ISA market too. This has been incredibly competitive recently, with some banks offering more on easy-access Cash ISAs than the equivalent savings accounts.
We could see the deals over 5% pull back, despite the fact we’re heading firmly into the traditional ISA season.
Regardless of Cash ISA rates, people are expected to pay over £10bn in tax on their savings this year. So, it’s worth considering a Cash ISA while interest rates are still relatively high.
Just remember, ISA and tax rules can change, and any benefits depend on your personal circumstances.
What’s next for fixed-rate savings?
More falls for fixed rates are likely to come, once the market is convinced that more cuts are on the way.
At the moment, it looks like this could be some way off, especially with tariff dramas fuelling unease over inflation.
At times like this, it’s easy to be bamboozled to a full stop, unsure as to whether rates will rise again before they fall.
However, if you hang on, in the interim you could be missing out on some rewarding deals.
Rather than waiting for the best possible moment to fix, if you’re looking to fix, it could make sense to take advantage of these rewarding deals while they last.
Just remember, you usually can’t withdraw from fixed rates until the term ends.
If the thought of scouring comparison tables for good deals fills you with dread, savings platforms, like Active Savings, make it easier by bringing rates from multiple banks in one place.
The rate cut and annuities – is now a good time to buy?
The fortunes of the annuity market have been transformed in recent years with incomes hovering just below all-time highs.
The latest data from the HL annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee.
Today’s interest rate cut will likely do little to dampen demand – it was flagged for months. And even if we get more rate cuts this year, they’re likely to be few and far between, meaning any downward pressure on income is likely to be fairly gradual.
The upshot is that annuities are expected to deliver great value to retirees for some time yet.
There’s a range of annuity options and your choices can have a big impact on the income you get. However once you’ve bought an annuity it can’t be unwound, so it’s vital you do your homework before you commit.
Using an annuity search engine to look across the market is a great way of making sure you get the best deal. Including details on your health can also give you an extra income bump.
The government’s free Pension Wise service can help if you’re over 50 and need guidance about your retirement options. You should also get personalised financial advice if you need it.
It doesn’t have to be all or nothing
If you’re worried about tying yourself into an annuity rate now, it’s important to remember you don’t need to commit all of your pension at once.
Instead, you can annuitise in stages throughout retirement – securing guaranteed income as your needs change.
Taking a mix and match approach with income drawdown, where the remainder of your money can stay invested, can give you the flexibility of drawdown and the certainty of annuities.
And if you develop any health conditions, you can opt for an enhanced annuity with a potentially bigger income. Just make sure you include as much information as you can in your application.
Remember, annuity quotes are only guaranteed for a limited time and will vary depending on individual circumstances. With income drawdown your income isn’t secure, and it’s possible to get back less than you originally invested.
