What’s next for interest rates? Key questions for savers in 2025
January 2025
What’s next for interest rates? Key questions for savers in 2025
January 2025
Interest rates rising and falling can often have a huge impact on your finances. If interest rates are higher, you may be able to find savings accounts that pay more in interest on your savings, meaning your money works harder for you. But in this instance, paying off credit cards or mortgages may become more expensive. The opposite happens when interest rates are lower. While you don’t get such a big reward for stashing money away, repaying loans can become less expensive.
Because interest rates can have such a significant effect on finances (and because recently they’ve been changing as the Bank of England tries to tame inflation), we’ve highlighted some of the key questions you could consider around interest rates for 2025.
What will happen to interest rates this year?
This is the big question – and the truth is, nobody knows with absolute certainty what will happen with rates in 2025.
Finance experts do produce annual predictions. This includes the Bank of England. They set the base rate that influences the interest rates UK building societies and banks offer their customers on products like savings accounts. In December 2024, Andrew Bailey, the Bank’s Governor, suggested there could be four cuts of 0.25% each to the base rate in 2025.1 That would take the rate from its current 4.75% level down to 3.75%, and as banks and building societies react to these changes, it could make it cheaper to borrow money but also bring interest rates down on ISAs, bonds, and other savings accounts.
When will interest rates be cut?
It isn’t possible to know exactly when, or even if an interest rate cut might occur in 2025. At the start of 2024, experts were predicting as many as six rate cuts, but only two occurred.2
The Bank of England assesses a vast range of economic data before deciding whether to make changes to interest rates, and these can change relatively quickly.
Could interest rates rise?
The Bank of England could increase the base rate if it felt this was necessary. This could mean savings rates rise. But most commentators at the moment believe a more likely scenario would be fewer cuts and rates held where they are for longer.
One of the most important factors behind interest rate decisions is inflation. The Bank of England aims to keep inflation at 2%, and if it strays too far above this, then it becomes more likely that it will increase interest rates. While inflation rose to 2.6% in the 12 months to November, predictions suggest it will begin reducing towards 2% as the year progresses.3
What would falling interest rates mean for my savings?
However, if you already have savings tucked away, the impact might not be immediate (depending on what type of account you have). If your money has been put into a fixed rate savings account, the amount of interest you earn will not change until the product’s term ends. It’s when your deal ends that a change in interest rates will matter, as the rates on offer may be less generous.
For those with savings in a variable rate account, the impact of interest rate changes would be more immediate as these accounts broadly echo the rises and falls in interest rates.
So, what should I do with my savings?
If it looks like interest rates will fall, some savers might decide to seek out a longer-term savings account that offers a fixed rate of return. Acting now could mean they secure a rate for one, two or even five years while the rates on variable accounts and new fixed products fall when interest rates drop. However, choosing a fixed rate now could mean you lose out on the benefits of a higher return if interest rates were to rise. And while fixing might sound appealing, there are other important factors to consider such as your ability to access your money without a notice period or penalty.
Making the right decision about your next savings product really depends on your objectives and your circumstances. Are you saving for a distant goal or something more immediate? Do you want to have access to your cash, or would you be happy to put it into a fixed rate account with restrictions? The answers to this question will guide you to an account that’s right for you.
At Coventry Building Society, we offer a range of fixed and variable rate savings products, from fixed bonds to easy access ISAs, which could help you to reach your savings goals.
If you’re not sure which product best suits your needs, seek out more information from your building society or bank, or speak with a financial adviser who can help you to understand the savings options on offer to you.
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