The Bank of England (BoE) has reduced interest rates by 0.25 percentage points to 4.25 per cent.
Experts suggest this could mark the beginning of a broader easing cycle, with rates potentially falling to 3.5 per cent by year-end. However, this depends on global trade developments and domestic inflationary pressures, including the recent employer National Insurance increase.
But pension scheme investors are expected to welcome the rate cut. According to experts, most schemes are now well-funded and heavily hedged, reducing their sensitivity to falling yields.
Standard Life managing director for retail direct Dean Butler says: “This is the second significant move by the MPC in 2025 and maybe not the last following lower than expected March inflation and sluggish economic growth. Uncertainties remain around any inflationary impact of April’s employer National Insurance increase, market uncertainty following the US tariffs and wider geopolitical issues however some forecasters predict a series of rate cuts in the year ahead.
“For savers – there’s a more complex picture. Cash savers may find returns begin to erode in real terms, particularly if inflation remains above the Bank’s 2 per cent target. While it’s important to maintain a level of accessible, cash-based savings for emergencies, those with longer-term goals might consider investing to help make their money work harder. Although investing carries more risk, it can lead to greater returns and has the potential to beat inflation over a number of years. For those able to take a longer-term approach, saving into a pension offers the benefits of investing as well as significant tax efficiency.”
XPS Group chief investment officer Simeon Willis says: “The interest rate reduction will be welcomed by most pension scheme investors. Long-term inflation expectations fell following President Trump’s tariff announcements, possibly reflecting expectations of lower-cost imports being diverted to the UK instead of the US. March inflation also came in lower than forecast, though it remains above the Bank of England’s target. These factors have set the scene for a gradual easing of interest rates, supporting a UK economy increasingly focused on finding new sources of growth.
“Traditionally, lower interest rates are seen as negative for pension schemes, because they increase the value of liabilities. But with most schemes now well-funded and highly hedged, many are less concerned with falling yields. In fact, persistently high long-term yields have created friction, creating operational challenges which constrains the ability to maintain exposures to illiquid growth assets. What schemes want now is stability, combined with sustained growth to support the long-term value of their credit and other risk assets, maintaining funding levels. Economic growth sits at the heart of this desirable scenario.”
LV= chief investment officer Adam Ruddle says: “The Bank of England cutting interest rates to 4.25 per cent was widely expected, reflecting moderating inflation and a slowing economy amidst trade tensions.
“Encouragingly, this reduction could signal a series of rate cuts, with interest rates anticipated to fall to 3.5 per cent by year-end. This is very dependent on the path of US trade policies and any trade agreements agreed. “Homeowners and prospective buyers will likely breathe a sigh of relief, as lower interest rates may lead to reduced mortgage rates. However, savers may see diminished returns on their deposits. According to LV’s Wealth and Wellbeing research, just under one in five (18 per cent) are concerned about their savings being devalued by low interest rates and inflation.
“Despite these concerns from savers, further cuts are expected. LV’s research shows more than two in five (41 per cent) of mortgage holders are worrying about rising day to day costs, and lower rates could provide much needed relief for consumers.
“A reduction in interest rates may be a welcomed boost for the economy. Borrowing will become more affordable, thereby encouraging spending and investment.”
Mercer European head of economics and dynamic asset allocation Julius Bendikas says: “The Bank’s Monetary Policy Committee faces a tricky balancing act with inflation and wages still elevated. Global trade issues are likely to put downward pressure on both growth and inflation. We expect the Bank to keep cutting rates, reaching 3.5 per cent or lower by 2026, as price and wage inflation moderate further.”
