The UK’s economic growth has been unstable so far in 2025. It started strongly at the beginning of the year, but the progress reduced sharply in April. Recent political happenings across the globe have also affected performances, particularly the conflicts in the Middle East, driving a rise in oil prices. Conversations around interest rate cuts have lingered since last year, and Bank of England officials were expected to cut rates in May finally. What happened, however, was an unexpected pause in this plan. The Deputy Governor of the Bank of England revealed recently in an interview with the BBC that the uncertainty facing the economy has contributed to the new change in interest rate decisions. A new bank meeting date is in view, and predictions are flying on what to expect. Here is our piece on what investors can expect.
Where interest rates stand today
The UK interest rate was last recorded at 4.25% after the BoE voted 7-2 to keep the rate steady in its recent June meeting. It’s pertinent to note that the UK’s inflation rate is currently at 3.4%, much higher than the BoE’s 2% target for the year. This and other economic indices have been clear signs of the UK’s struggling economy, so it’s understandable that there are growing demands for this reduction. The Bank, however, revealed that the decision was made at the same time as it was keeping watch on the “highly unpredictable” situation with rising energy prices.
Since their last meeting in May, oil prices have increased by 26%, and gas prices have grown by 11%. Iran and Israel have had a series of attacks, and the climate in the region is becoming even more turbulent. The United States’ attack on Iran’s nuclear facilities on the 22nd of June is another concerning issue that might change the trajectory of the war. The BoE is currently focused on the impact of these happenings on the country’s inflation and so is carefully monitoring the situation before the cut.
Predictions for future rate movements
The next gathering has been set for August, and economists and analysts believe there could be a 25-basis-point cut by this time. Banks and the rest of the markets also anticipate that rates will edge down to 4% or a little lower in the 3rd quarter of the year, but all of this is still quite uncertain, with the different political upheavals worldwide. While anticipation remains, there is also a possibility of two or three additional cuts between November and early 2026, and investing firms like Investec forecast three cuts, bringing the current number to at least 3.75% by year-end.
How interest rate changes affect investors
The relationship between interest rates and market investments has always been constant and mostly the same across several assets. When the former increases, borrowing costs for companies rise, potentially leading to a decline in stock prices. Conversely, when rates are reduced, borrowing becomes less expensive, and the stock market thrives. In most cases, one of the sectors that gets hit the most is stocks, but the effect is never limited to this sector. Foreign exchange, stocks, bonds, real estate and other financial markets are also hit.
For forex market investors, it’s important to note that higher interest rates generally strengthen the country’s currency and attract more foreign investors, while decreases tend to weaken it. This is mainly because, with this increase, investors usually get better returns and the currency demand skyrockets. If the BoE decides to proceed with this reduction, the GBP might depreciate for some time before stabilising. Interest hikes cause bonds’ prices to fall as new bonds pay better rates, making older ones less attractive. In the real estate market, mortgage rates often rise with a rate hike, and demand tends to drop. Investors can expect the opposite in a contrary situation.
For market investors, it’s important to know how every asset responds to these market movements and economic changes. It’s also important to prioritise securities that can withstand such changes, or even yield potential profits in such a situation. Diversification is another way to go because it helps traders cap their losses as much as possible. You could also consider investments like spread betting, ETFs and CFDs as alternate ways to minimise risk. Regardless of what you decide on, remember that rate hikes tend to cool inflation and safer assets like short-term bonds and stocks, while reduction stimulates growth, making other assets like real estate and forex more volatile.
Preparing your portfolio for the next BoE move
The best thing you can do as an investor right now is stay updated on daily news and information about interest rate changes. Economists and analysts are watching August for the next big news, and you should have this ticked on your calendar. Use your trading platform’s news notification features and follow closely for other political and economic events that could affect the BoE’s decisions. Lastly, tailor your portfolio to safe-haven assets, and diversify for better risk management.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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