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February 07, 2025
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Market Updates • February 07, 2025
Bank of England Cuts Interest Rates: UK to Narrowly Avoid Recession
Hoxton Blog • Bank of England Cuts Interest Rates: UK to Narrowly Avoid Recession
The Bank of England made a significant move, lowering its base interest rate from 4.75% to 4.5%, as predicted by analysts.
This decision has come at a critical time as the UK economy faces challenges like stagnation and fluctuating inflation. For the following three months, the Bank of England now expects the economy to shrink by 0.1%, down from its previous forecast of 0.3% growth.
The economy is expected to narrowly avoid a recession in the coming months, as a recession is defined as two back-to-back three-month periods of economic contraction. The latest official growth figures for the UK economy will be published on Thursday 13th February 2025.
The Impact on Borrowing and Financing
The reduction in interest rates presents should hopefully filter down fairly quickly to those with borrowing needs.
With borrowing costs declining, it’s a favorable time for businesses and individuals to secure capital more affordably than it has been of late. For those with existing variable-rate loans or considering new financing options, this should reduce your borrowing costs.
Opportunities in Real Estate
Real estate remains a favoured asset class for some investors – although having provided terrible returns in comparison to the overal market returns over the past 15 years.
The UK House Price Index has rose approximently 80% over the past 15 years – whilst the MSCI World Global Equity Index has risen over approximately 600% over the same period.
An interest rate reduction could present opportunities with borrowing costs declining, and banks more eager to lend on these assets due to better covenants on rents.
Additionally, a weaker pound due to lower interest rates could offer an attractive entry point for international investors seeking UK assets, further boosting market activity.
However, with the recent UK budget introducing increased capital gains taxes and other tax hikes, there could be additional risks involved in expanding property holdings. Our advice is to seek out a good tax adviser (we have some inhouse!) that can help you structure your property investments in the most tax efficient manner. Get in touch with us today to find out how we can help you.
Cumulative Index Performance - Gross Returns GBP (Jan 2010- Jan 2025)
Impact on Investment Strategies
An interest rate cut can have implications across various asset classes, influencing stock market performance, bond yields and alternative investments. Understanding these effects can help investors make informed decisions while staying focused on long-term financial goals.
1Equities
For those with significant equity exposure, a rate cut could stimulate market activity. Historically, lower interest rates tend to favour growth sectors, with companies benefiting from cheaper borrowing costs and improved profit margins. In the short term, this may encourage a rise in stock prices, particularly within sectors sensitive to interest rate changes, such as technology and consumer goods.
However, it’s essential to remember that reacting to short-term market fluctuations can disrupt our long-term investment strategies. Instead, maintaining a disciplined approach and staying invested in stable, long-term investments is crucial for achieving sustained growth over the long run.
2Bonds
For fixed-income investors, the rate cut may lead to lower bond yields. While this generally results in an uptick in bond prices for existing assets, it also signals a shift towards short-duration bonds or inflation-linked investments.
Although this may seem tempting in the short term, it’s crucial to avoid making hasty decisions based on current yields. The long-term strategy should focus on the overall diversification and stability of the portfolio, ensuring bonds continue to serve their role in risk management and income generation over time.
3Alternative Investments
In a low-rate environment, many sophisticated investors seek diversification beyond traditional asset classes. Alternative investments such as private equity, hedge funds, commodities, and structured products may provide higher returns and lower correlations to traditional financial markets.
While it may seem appealing to adjust your portfolio to capitalise on these opportunities, it’s important to maintain a long-term investment mindset and avoid reacting to temporary market conditions. A diversified approach ensures that your portfolio remains resilient, regardless of short-term market movements and interest rate changes.
Staying Focused on Long-Term Growth
While this rate cut offers short-term relief, it’s important to stay focused on your long-term financial objectives. Maintaining a disciplined investment approach, based on a clear strategy and a diversified portfolio, remains essential.
Rather than reacting to the noise of daily market fluctuations, staying patient and committed to long-term goals ensures that your wealth grows sustainably, regardless of the external economic conditions.
Working closely with your financial adviser will help you manage these changes and align your strategy with both current market conditions and long-term objectives. The goal is not just to react to shifts in interest rates, but to consistently move toward greater financial security and growth and ensure you are on track with your financial plan.
Long-Term Strategy Amid Lower Interest Rates
The Bank of England’s decision to lower interest rates brings both opportunities and challenges. While the immediate impacts on borrowing costs and certain asset classes may seem compelling, it’s vital to keep a long-term perspective. Avoid reacting to short-term market shifts, and instead, stay focused on a well-diversified, long-term investment strategy. Although inflation is forecast to ease, the Bank expects it to take until the latter part of 2027 to fall back to the 2% target.
If you are interested in learning more about how you can make the most of a lower interest rate environment, check out our article on 6 Tips for When Interest Rates Fall for ways to ensure your financial decisions are aligned with both current conditions and your long-term goals.
As always, stay focused on your long-term financial goals, as we do not care about short term market movements – we really care about long term market growth. If you’d like to discuss how your strategy continues to align with your objectives, reach out today for expert guidance.
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