By David Prosser
Interest rates in the UK are falling. But how much further will they come down – and what does that mean for your savings?
To try to answer those questions, we need to read the runes of today’s data and to indulge in a little crystal-ball gazing. But first, it’s worth making a broader point: trying to second-guess economic moves with too much precision is a fool’s errand, particularly in today’s highly uncertain environment. Instead, focus your energy on organising your savings in a way that suits your financial goals and priorities.
That caveat aside, one thing we do know for certain is that the Bank of England’s Monetary Policy Committee (MPC) reduced the current “Bank Rate” from 4.5% to 4.25% in May, the fourth rate cut since August 2024. With inflation falling during 2024 and into this year, the MPC felt able to move back towards lower rates.
How far and how fast?
So, where do we go from here? Well, that depends on what happens with inflation and the broader UK economy during the rest of the year. The Bank of England itself says that if inflation pressures continue to ease, the MPC should be able to make further interest rate cuts. But it also warns its policy will be “gradual and careful”.
Senior economists take different views of what’s likely, but the consensus of opinion is that the MPC will make two further 0.25 percentage point interest rate cuts before the end of the year – and follow that up with more reductions in 2026. However, if you look at the current prices of assets such as gilt-edged bonds (gilts) which are UK government bonds issued to finance public spending, they imply that investors are expecting only one more reduction in 2025.
This isn’t an exact science – and the minutes of recent MPC meetings suggest its nine members have different views about how to proceed. Importantly, the MPC’s mandate is to set interest rates with the aim of keeping inflation at 2%. In March, the inflation rate did fall almost to that level. Unfortunately, the data for April and May revealed it had jumped back up to 3.5% from 2.6%. Some of that increase is expected to be temporary – rather than sustained by underlying cost pressures in the UK economy – but it’s not clear how much of it, which is why MPC members, economists and investors are split.
How to organise your savings
Against this backdrop, think about how to make the best possible use of the savings products on offer today. A number of banks and building societies have withdrawn market-leading savings accounts in recent months. And it is always important to ensure your money is held in competitive products.
Still, your savings strategy also needs to reflect your circumstances. Cash that you could need access to very quickly should be held in accounts that make this possible without early withdrawal fees or loss of interest; you’ll need an instant or easy access account for this money. For cash that you’re confident you can leave untouched for longer, it makes sense to investigate savings products that might offer a better deal over several months or even several years.
As a general rule, savings providers pay higher rates on accounts where you’re expected to tie up your cash for longer. However, this isn’t always the case because providers are also conscious of how interest rates are likely to move in the future.
You also have the option of choosing a fixed-rate savings account, where you’re guaranteed to earn the same interest rate for the life of the product. Other accounts pay variable rates, which the provider can move up and down – following a Bank of England Bank Rate change, say.
Right now, for example, United Trust Bank pays 3.75% Gross/AER* a year on its easy access savings account, and interest rates ranging from 3.90% to 4.25% Gross/AER* on its notice accounts, where you must give between 30 and 180 days’ notice of withdrawals. These are all variable rates, so could come down if and when the Bank cuts rates this year.
Alternatively, United Trust Bank also offers fixed-rate savings bonds paying between 3.90% and 4.25% Gross/AER* a year. Its longer-term fixed-rate bonds – which run for four and five years – pay the lower rates, reflecting current expectations of falling rates to come.
Those rates put your choices into perspective. Easy access savings products are valuable if you need more or less immediate access to cash. But if you’re prepared to give notice of withdrawals, you’ll likely be able to earn more. And in today’s interest rate environment, it’s worth considering locking into rates that protect you from MPC rate reductions to come.
Finally, remember there’s nothing wrong with splitting your cash into different pools – taking a portfolio approach. For example, use an instant or easy access account for cash you want to keep on hand, but consider longer-term products for the rest of your savings if you think you can earn more interest on these accounts.
*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. Gross is the interest rate without the deduction of income tax. Interest is paid gross into your account.
David Prosser is an award-winning personal finance journalist. Although this article may contain helpful information and tips, this is his view of the outlook for interest rates and not financial advice. If you are unsure about what is best for your specific requirements you may wish to seek advice from an independent financial adviser.