6 Tips for When Interest Rates Fall

To make the right financial decisions, it’s important to grasp why interest rates are dropping in the first place. Central banks like the BoE, the Fed, and the European Central Bank (ECB) adjust rates based on economic conditions. When they reduce rates, it’s typically to encourage borrowing and spending, which can stimulate economic growth. 

Lower interest rates make borrowing cheaper, which can lead to increased investment and consumer spending. However, it also means that traditional savings accounts yield lower returns, impacting those who rely on interest income. 

Rate cuts can sometimes be a short-term measure to navigate a particular event, or they can be the start of an expected longer cycle of cuts. For investors, understanding this environment is crucial to choosing where to place your money most effectively.

For example, if a rate cut is the first in what is expected to be many, savers may want to lock in their cash reserves at their current levels. However, if rates are expected to rebound quickly, this might not be the best option.

When interest rates drop, returns from savings accounts generally decrease as well. If you’re holding significant cash in savings, this could mean a reduction in passive income from interest. In many cases, this could be below the rate of inflation, meaning a negative real-terms return on that money.

As a result, investing becomes more appealing as a way to generate returns in a low interest rate environment.

Stocks, bonds, and other investments may offer better potential for growth compared to stagnant savings accounts. However, this doesn’t mean you should move all your cash into the market. Having some cash for emergencies is always wise, but with rates low, consider adjusting your strategy to include more income-generating investments.

The Hoxton Wealth app can help you easily manage all of these different options in one place,  and our expert financial advisors can help optimise your asset allocation with advice on stocks, funds, and other investment vehicles that align with your financial goals.

In times of dropping interest rates, diversification becomes even more important. This isn’t generally due to rates themselves changing, but rather as protecting against what a fall in rates represents.

Usually, falling rates go hand in hand with economic weakness. By spreading your investments across different asset classes, you reduce your reliance on any one investment type and increase your ability to withstand market fluctuations. While stocks may perform well over the long term, it’s still essential to balance your portfolio with safer investments to help ride out any short term volatility.

Consider a mix of equities, bonds, and perhaps some alternative assets like real estate or commodities. Bonds, for instance, often become more attractive when interest rates fall, as bond prices typically rise when rates go down. Assets like gold may serve as a hedge, particularly if economic uncertainties persist. For those more adventurous investors cryptocurrency might even have a place, though it comes with both opportunities and risks.

A well-diversified portfolio can help you achieve a balance between growth and risk management throughout the interest rate cycle.

Falling interest rates don’t just impact savings and investments, it also means that borrowing becomes cheaper. If you have existing loans or a mortgage, a drop in rates can be a good time to consider refinancing to secure a lower interest rate. Refinancing could reduce your monthly payments or allow you to pay off your debt faster, freeing up funds for investment.

Even a modest reduction in the interest rate on long-term debt like a mortgage can save tens of thousands on the total lifetime interest paid.

Keep an eye on interest rate news and speak to a financial advisor to see if refinancing aligns with your long-term financial strategy. Lower borrowing costs can provide an opportunity to redirect funds toward higher-yield investments, enhancing your overall financial position.

Certain sectors tend to benefit more when interest rates are dropping. Companies with high levels of debt, like utilities or telecoms, may experience lower interest expenses, which can boost their profitability.

One of the main aims for central banks' lower rates is to increase the level of consumer spending. As a result, consumer goods companies such as retailers, hospitality and leisure can be sensible choices. So too can real estate funds or companies, which often perform well when borrowing is cheap.

Dividend-paying stocks can also become attractive alternatives for income-focused investors when savings account yields are low. While dividend yields fluctuate with stock performance, they can provide a relatively steady income stream that might outpace returns from cash in a low-interest-rate environment. 

As always, make sure to evaluate each investment on its individual merits and potential for growth. If you’re not sure where to start, the experts at Hoxton Wealth can help you choose the right investments for any economic environment.

As mentioned earlier, bonds tend to become more appealing when interest rates fall. Bond prices generally rise as yields decrease, which can help offset any potential stock market volatility that occurs as a result of economic uncertainty. 

Government bonds, particularly those from stable economies, can serve as a reliable income source when rates drop. However, this relationship can work both ways, as we saw in recent times. When interest rates rise, bond prices generally fall, which investors need to be aware of.

Some investors look to commodities like gold as a hedge against economic instability and currency fluctuations, which often coincide with rate cuts. Gold has historically held its value during economic uncertainty, making it a popular safe-haven asset. 

So, iIf you’re looking for ways to mitigate risk in your portfolio, you could consider incorporating bonds and perhaps a small allocation to commodities. In addition to gold, there are many investment funds which invest in a wide range of other commodities, including oil, agricultural commodities like wool, and other precious metals.

When interest rates are dropping, the financial landscape shifts, creating both challenges and opportunities for investors. By understanding the economic reasons behind rate cuts, prioritising investments over traditional savings, diversifying your portfolio, and considering refinancing options, you can position yourself to make the most of a low-rate environment.

These tips can help with the broad aspects of your strategy, but the fine details can be a little more challenging.

Hoxton Wealth’s financial planning and investment services can help, providing personalised guidance, helping you navigate any interest rate or economic condition. If you’d like to arrange a free initial consultation with one of our advisors, get in touch today.