Protecting savings in a falling rate environment

Date

Aug 21, 2025

Protecting savings in a falling rate environment

On 7 August 2025, the Bank of England (BoE) reduced its base interest rate to 4.0%, a drop of 0.25 percentage points, bringing it to its lowest level since March 2023. This reflects softening economic conditions, including slower growth, weakening employment, and inflation that remains above target at around 3.6%.

Understanding the change

The decision to cut rates is intended to encourage borrowing and support economic activity. However, lower interest rates also mean that cash savings may generate less income. This is a time when careful financial planning can help safeguard long-term security.

What savers should consider

Review your existing accounts
With further base rate reductions possible over the coming months, now is the time to check whether your accounts are still offering competitive returns. Some providers are holding higher rates, but these may become less available.

Explore fixed-term savings
Fixed-rate accounts offer greater certainty and can help protect your savings from further rate reductions. If you have capital you are comfortable locking away for a period of time, this may be a sensible step to secure higher returns.

Retain flexibility where needed
Balancing access and growth is important. Some easy-access accounts are still offering rates above 4.5% for a limited time, giving you both availability of funds and competitive returns.
Use tax-efficient vehicles
Consider making full use of your annual Cash ISA allowance, currently £20,000. ISAs provide tax-free interest and can be an effective way to preserve more of your savings over time.
Monitor bonus and promotional rates
Some accounts offer elevated interest for an introductory period. Be mindful of when these rates expire, as they often drop significantly afterward. Set reminders to reassess and switch where necessary.
Build a diversified savings strategy
A well-structured savings plan will combine accessible cash for short-term needs with fixed-term solutions that protect against volatility. This helps to preserve liquidity while also securing longer-term returns.

Don’t hold more cash than you need

While cash plays an important role in any financial plan, it is unlikely to provide a real return ahead of inflation over the longer term. For higher and additional rate taxpayers, the return after tax on savings is often well below current inflation levels, meaning the real value of money held in cash may decline over time. Holding excessive amounts can therefore carry its own risks. Where you have substantial cash balances, it may be worth speaking to a financial adviser about whether investing some of these funds could offer better long-term growth potential, in line with your risk profile and objectives.

Will rates fall further?

Market analysts are divided. Some expect another 0.25% cut before the end of the year if inflation eases and unemployment rises. Others believe the BoE may pause to assess the impact of recent reductions.

Regardless, it’s important that you stay informed and remain flexible. Interest rates are cyclical, and today’s environment is not permanent.

Summary

Review your savings accounts and move funds to providers offering higher rates before further reductions take effect.
Consider fixed-term savings for surplus capital to secure stronger returns and protect against future rate cuts.
Maintain liquidity by using competitive easy-access accounts for money you may need in the short term.
Make full use of your annual Cash ISA allowance to benefit from tax-free interest.
Monitor bonus and promotional rates closely, and be ready to switch when they expire.
Build a balanced savings plan that combines accessible cash with fixed-term holdings to meet both short and long-term objectives.

Protecting savings in a falling rate environment