What do rate cuts mean for markets?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

It's the same story for the start of the rate cutting cycle in February 2001. In that case too, in the year after the first rate cut, both the FTSE 100 and FTSE 250 fell while UK government bonds and cash saw a modest increase in value.

This is because the Bank of England usually begins cutting interest rates when the UK economy is going through difficult times. Slashing rates is a way to stimulate the economy and (hopefully) get people spending and borrowing. However, when the country is in a recession, company profits will likely be hit, and stock prices tumble because of this negative picture. Investors often seek out safe havens like bonds and cash instead.

The rate cuts that began in December 2007 coincided with the Global Financial Crisis (GFC) while the cuts from February 2001 onwards were part of the unwinding of the dotcom bubble that saw big stock market falls.

But by the end of the rate cutting cycle, it can be a good time for the stock market.

The Bank of England will stop cutting rates when it believes the negative period is over and the economy no longer needs stimulating. Stock markets often anticipate that and, in some cases, are already rising by the time the rate cutting cycle is over.

As you can see below, in the 12 months after the rate cutting cycle during the GFC ended in March 2009, both the FTSE 250 and FTSE 100 jumped. If you’d have invested £100 in the FTSE 100 when that final rate cut happened, by March 2010 your investment would have been worth £145 and if you’d have invested in the FTSE 250 it would have been worth £159. Both bonds and cash remained essentially flat over that period.

Again, it’s the same story in the 2000s. If you’d have invested £100 around the time of the final rate cut of that cycle in July 2003, 12 months later that would have grown to £115 if invested in the FTSE 100 or £130 if invested in the FTSE 250.

In both cases, the FTSE 250 outperformed the FTSE 100. This may be because this index is more heavily dominated by domestic companies, which are more sensitive to UK interest rates and the UK economy. Whereas the FTSE 100 has more of an international focus.

It’s important to note that not all rate cutting cycles will follow this same pattern. Every situation is different and will depend on the economic environment at the time.

For example, when rates began falling in October 1990, the UK stock market went up rather than down.

Where are we in the rate cutting cycle?

Forecasts from Fidelity International suggest the Bank of England will cut rates twice more this year and then rates will remain flat into 2026.

However, ultimately it is extremely difficult to know exactly where you are in the rate cutting cycle. For example, rates began falling in 1998 in response to a financial crisis but then jumped back up again in 1999 as the Bank of England tried to control the market fervour of the dotcom bubble.

Therefore, for most investors, it is easier to simply invest regularly each month so that you’re putting money into the market when it’s going up and when it’s going down.

What’s more, taking a long-term view can help in seeing through market lumps and bumps. Even if you’d invested in the FTSE 100 in December 2007, amid the stock market tumbles of the GFC, your investment would have recovered by the end of 2010. If you’d held on till today, that investment would have more than doubled in value. If you’d have invested in the FTSE 250, it would have more than tripled. Please remember past performance is not a reliable indicator of future returns.

As you can see from the chart below, it is over longer periods that the drag of holding cash rather than investing really emerges. Of course, cash and investing are fundamentally different options and it’s crucial to consider your own risk appetite and time horizon before deciding to invest.

Past performance is not a reliable indicator of future returns

Source: Refinitiv from 31.7.20 to 31.7.25. Total returns in local currency. Excludes initial charge.