Scott Kingsley, Senior Wealth Advisor
The Bank of England has dropped the base rate from 4.75% to 4.5%, but what does the rest of 2025 hold for the UK and global economies?
With significant changes on the horizon, interest rates will largely shape the financial landscape for individuals in the UK and beyond.
By understanding global interest rate trends, forecasts, and potential impacts, you’ll gain the clarity needed to prepare for the rest of the year and make the most of opportunities while mitigating potential risks.
Global banks are responding to evolving economic conditions that will likely affect interest rates after a period of increases to help combat inflation.
According to the International Monetary Fund, global rates will gradually ease as inflation steadies, but the pace and extent of these changes vary depending on the region.
The Bank of England is expected to reduce its base rate further throughout the year, potentially to 3.75% by the end of the year. This should provide relief for mortgage holders and encourage UK business investment.
Many predicted that US interest rates would continue to be cut as they were in 2024, with three consecutive drops. However, the Fed kept the rate steady between 4.25% and 4.5% during its January 2025 meeting, pausing the rate-cutting cycle.
This is likely due to a combination of moderate inflation not easing as much as predicted and uncertainty from recent trade policies like the highly publicised and controversial global trade tariffs.
In March, the European Governing Council decided to lower the three key ECB interest rates by 25 basis points. Interest rates to the deposit facility, the main refinancing operations, and the marginal lending facility will be decreased to:
Respectively, taking effect from 12th March 2025. This is in line with projections to cut rates to between 2% and 2.5% by the end of 2025, although some experts argue it could be lower.
Economic recovery across the EU remains fragile, but stabilising energy prices and the easing of supply chain pressures are positive signs for the future.
For business owners and individuals, falling interest rates are generally good news. They can stimulate economic growth by encouraging more investment and consumer spending and have the following effects on individuals:
While most experts predict interest rates to fall in 2025, geopolitical tensions, shifts in government policies, and other economic developments could derail many forecasts and lead to short-term increases.
This could lead to:
A reduction in interest rates is great news for investors with the foresight to act early. With more affordable borrowing and shifting economic conditions, certain asset classes and strategies could present fantastic growth opportunities.
These include:
Stock markets often see a boost in times of falling interest rates, and sectors like tech, consumer goods, and renewable energy tend to perform well. Reduced rates also mean cheaper credit, so high-quality growth stocks could have strong potential.
Historically, falling interest rates have meant higher bond prices. Long-duration bonds are particularly attractive and usually perform well in these environments because their fixed yields are higher than those of newer, lower-yield options.
As well as property, private equity, infrastructure, and venture capital generally see increased activity during periods of lower inflation. So, if you want to diversify your investment portfolio, you could look towards these kinds of alternative assets that could offer higher returns than traditional savings accounts.
Inflation and interest rates are closely interconnected because central banks use interest rates as a primary tool to manage inflation.
Looking ahead to the rest of 2025, inflation is expected to steady globally after sharp increases in recent years. The International Monetary Fund (IMF) forecasts global inflation to decline to around 4.2% by the end of 2025 and to 3.5% in 2026.
In the UK, the Bank of England has a 2% target for inflation to ease cost-of-living pressures and pave the way for potential rate cuts. However, many argue this is unrealistic, with inflation predicted to rise to 3.7% in Q3 of 2025. It’s therefore more likely to be a gradual decrease, with the 2% target being realised in 2027 or later rather than 2025.
Despite positive trends in multiple countries, inflation risks remain, particularly from geopolitical tensions and potential supply disruptions. For investors, understanding these dynamics is crucial, as interest rate decisions driven by inflation trends will continue to shape financial markets throughout 2025.
Not all regions experience rate cuts or rising inflation simultaneously, and not all asset classes react uniformly in the face of economic changes. Diversification helps you improve your chances of returns and reduce risk by benefiting from various interest rate cycles depending on the region, as well as accounting for inflation.
Most experts predict interest rates will fall in 2025, and savvy investors will have plenty of opportunities. However, with opportunities comes risk, so staying informed is highly advised, along with a long-term financial strategy that properly accounts for factors such as interest rates and inflation.
With the right planning and strategy, you can take advantage of falling interest rates in 2025 and prepare yourself and your finances for growth in the years to come.
Feel free to get in touch to discuss your financial strategy and how interest rate reductions might affect it.