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You may have felt the effects of higher interest rates recently. Perhaps your mortgage payments have increased, or you’ve noticed that borrowing money is now more expensive. This is all linked to how much the base interest rate has changed in the last few years.
The base rate is used by the Bank of England (BoE) to charge other banks when lending money, so it usually influences the interest that borrowers pay, and what savers earn.
But beyond saving and borrowing, you might be wondering: “How does the BoE’s base rate affect stock markets, and could my investments be influenced if it falls in 2025?”
Keep reading to discover all you need to know.
The base rate is primarily used as a tool to maintain the rate of inflation at its target rate of 2%
The base rate is used by the BoE to keep a handle on inflation, with a target rate of 2%. In theory, this is a case of cause and effect: higher interest rates mean consumers spend less, which should help reduce inflation, as price rises tend to slow down in response.
Between 2020 and 2022, the UK’s sharp increase in inflation was largely due to strong global demand for consumer goods during the pandemic and lockdowns, related supply chain disruptions, and climbing energy and fuel prices.
While the Office for National Statistics (ONS) reports that inflation reached a peak of 11.1% in October 2022, the House of Commons Library states that it began to climb in 2021. It may have come as no surprise to you, then, that the BoE was simultaneously hiking the base rate.
Indeed, between December 2021 and August 2023, the BoE raised the base rate 14 consecutive times, bringing it from a low of 0.1% to a high of 5.25%, and subsequently making borrowing more expensive for consumers.
Once inflation began to fall throughout 2023 and 2024, the BoE’s Monetary Policy Committee (MPC) took a more conservative approach to managing inflation. They made two modest cuts in August and November 2024, and have since held it at 4.75%, as of their last meeting in December 2024.
So, while the base rate rose swiftly during the pandemic to help curb inflation, it’s unlikely that we will see major changes over 2025. There were no base rate increases in 2024 and the
While the primary purpose of the base rate is inflation control, it also has implications for the stock market.
Here’s what the base rate could do in 2025, and how it may affect your investments.
Base rate predictions may vary, but drops are expected throughout 2025
Forecasts suggest a potential downward trend for the base rate in 2025, and several factors could contribute to this.
This is Money reports that the BoE could cut rates up to three times this year, reducing it to 4%. Fidelity, on the other hand, reports that Goldman Sachs expects the base rate to drop as low as 2.75% by the end of 2025.
While there’s a clear disparity between these two forecasts, Andrew Bailey, Governor of the BoE, indicated, as reported in the Guardian, that there would be drops in 2025. He states: “We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
Ultimately, the BoE will continue its commitment to bringing inflation in line with its target of 2%. Inflation has been hovering around 2% for the last few months, and according to the House of Commons Library, it hit the BoE’s target in May 2024 – the first time since July 2021. Since then, according to the ONS, it has wavered between a low of 1.7% and a high of 2.6%.
In short, the second half of 2024 has demonstrated that a consistent inflation rate of approximately 2% is a real possibility, despite a slight uptick towards the end of the year. As a result, the BoE may slowly start cutting rates to stimulate economic growth.
However, the path forward is not without uncertainty. Global economic conditions, geopolitical events, and government’s fiscal decisions could all influence what happens to inflation, and in turn, the BoE’s policy decisions.
Remember, making predictions for what’s to come can help you plan and prepare, but making decisions solely based on forecasts may be unhelpful. This is where the support of a financial planner is particularly important, as they can help you navigate any future challenges.
Given these potential changes, it may be useful to understand the impact they could have on the stock market.
A lower base rate could influence the stock market through increased consumer spending, more business investment, and rising stock prices
As the base rate plays a crucial role in shaping the economic landscape, it can influence stock market performance. When the BoE lowers the base rate, borrowing costs for businesses and consumers decrease, usually stimulating economic activity.
This can lead to increased spending and higher business investment. With more to invest, businesses may see their earnings grow. This could translate into higher stock prices, as investors anticipate stronger company performance.
On the other hand, higher interest rates can make borrowing more expensive, which can squeeze profit margins and slow down company growth.
Higher interest rates also tend to increase the cost of borrowing for consumers, such as mortgages and loans. This can lead to reduced consumer spending, as individuals may have less disposable income.
Finally, rising rates may have an influence on company valuations. Higher interest rates can have a negative effect on the valuation of a company, particularly those with large amounts of debt. This is because future earnings may be worth less when interest rates are high.
Holding a balanced portfolio is key to weathering market movements
Maintaining a balanced portfolio can be a valuable strategy when navigating base rate fluctuations, or any event that causes market movements.
With the base rate set to fall this year, the relative appeal of assets such as stocks could increase. When interest rates drop, it can make stocks more attractive compared to bonds. This may be due to the expected return of those stocks over less risky options.
However, having a balanced portfolio could help mitigate the effects of market volatility. These could include a mix of assets, such as stocks and bonds, with varying levels of risk and return.
When one asset experiences a downturn, another may perform well, helping to cushion the overall portfolio.
Get in touch
The UK’s evolving financial landscape highlights the importance of proactive financial planning. To ensure your portfolio is well-positioned for the potential shifts of 2025 and beyond, schedule a call with your financial planner.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
