Due to tariff uncertainty in the United States, the Bank of England cut interest rates from 4.5% to 4.25%.
During the 2008 financial crisis, the UK base rate fell from 4.5 to just 0.5%.
Although today’s rates aren’t likely to go as low this time around, economists are forecasting that the base rate could fall by a full percentage point over the next six months, equating to 3.5%.
These cuts carry major implications for investors, with savings accounts and Cash ISAs leaning heavily on interest rates to inform the AER offered to savers.
But as some investment strategies can be negatively impacted by interest rate cuts, others can perform even better. With this in mind, let’s explore five investment strategies that could come into play in a low-interest-rate environment:
Stocks and Shares ISAs
While falling interest rates can see the returns for Cash ISA holders dwindle, Stocks and Shares ISAs could benefit from the lower cost of borrowing, with more businesses capable of taking out low-interest loans to support their growth.
It can be a challenge to know whether to save or invest when interest rates are being consistently cut, but Stocks and Shares ISAs have historically outperformed their cash counterparts, particularly during the years before the pandemic when the Bank of England kept its base rate lower.
Over the past 10 years, the average annual return on Stocks and Shares ISAs has been 9.64% annually, while Cash ISAs have returned just 1.21% on average over the same period.
Bonds
One of the best-performing assets in a falling interest rate environment is bonds. Because bonds are essentially IOUs from governments or corporations, providers know that investors must be incentivised as yields become lower.
If interest rates fall one percentage point in six months, for instance, the price of bonds must rise to grow their appeal.
Although there are some exceptions, bonds issued by creditworthy governments and companies will generally rise when interest rates fall. However, some riskier bonds can behave a little differently in low-interest-rate environments. With this in mind, it’s worth doing your homework before buying bonds on the expectation of falling interest rates.
Diversification
It also pays to spread your investments across a broad range of assets, sectors, and regions to help reduce the impact of any assets that could begin to underperform during periods of low interest rates.
Generally speaking, economic fluctuations such as interest rate changes can carry a far-reaching impact on your existing investment portfolios. Avoiding the temptation of putting all your eggs in one basket, no matter how much you believe in a sector, is essential.
If you’re unsure of how to invest in the wake of interest rate cuts, spreading your selections across a different range of assets, sectors, and geographies can help to build a level of resilience that could protect your portfolio against becoming exposed to dwindling stock values or weaker investor sentiment.
Gold
Gold is the quintessential safe-haven investment option. Periods of high interest rates tend to be more bearish for gold because of a lack of yield opportunities. But as rates begin to fall and cash returns drop, more investors are drawn to the precious metal.
The prospect of lower interest rates reducing bond yields can also help to point more investors in the direction of gold, making the metal more prone to appreciating in value. Should the US dollar begin to weaken off the back of trade uncertainty, gold is an investment strategy to keep an eye on in the months ahead.
Commercial Real Estate (CRE)
Because lower interest rates can help to support borrowing among businesses, the commercial real estate sector can be in line for a boost once the BoE continues its dovish reversion for interest rates.
In the United States, the Federal Reserve’s interest rate hiking cycle saw CRE property prices fall by 12% since their 2022 peak. However, a lower rate environment could embolden more businesses to revisit a return to office space or expand their customer-facing operations.
Lower financing rates can encourage more developers to take on expansion jobs, while lower discount rates can help to support property values, making CRE investing an attractive option.
Finding a Sustainable Strategy
The prospect of a lower interest rate environment could be concerning if you’re used to fixed-rate savings accounts and have been steadily growing your wealth in recent years. However, there are plenty of investment strategies that can help you thrive as interest rates are cut.
By exploring your financial goals and looking for a solution that suits your needs, it’s possible to find a sustainable investment strategy that can grow your wealth as interest rates continue to fall.