UK
The Bank of England held its interest rate at 4% at its November meeting. It was a tight decision, with four Monetary Policy Committee (MPC) members voting to reduce the bank rate to 3.75%.
The Bank last cut interest rates, from 4.25% to 4%, in August, the fifth cut since August 2024 and the lowest rate in over two years.
The BoE base rate had remained close to zero from 2009 through to end 2021. It then increased to contain high inflation, reaching 5.25% in August 2023. Once inflation levels improved, the Bank began to reduce its interest rate again. However, while the UK Consumer Price Index is now much lower than its 2022 11.1% peak, the current 3.8% is well above the 2% target.
The MPC November meeting minutes explain that members judged that although inflation remains too high, it has now peaked. If inflation remains on track, they “expect to be able to gradually cut rates further”.
EU
The European Central Bank cut its deposit rate eight times between June 2024 and June 2025, when it was reduced from 4% to 2% on June 11. The ECB main financing operations and main lending facility rates were also cut to 2.15% and 2.4%, respectively. Rates have been left unchanged since.
ECB President, Christine Lagarde, said the decision to hold rates in October was unanimous. Although risks have shifted, they remain balanced, leaving the central bank “in a good place”.
Average inflation stood at 2.6% in the Eurozone in September, as measured by the Harmonised Index of Consumer Prices. October inflation is estimated to be 2% in Portugal.
What does this mean for you?
Lower interest rates are generally seen as a positive development for economic activity and growth. Governments, companies and individuals can access funds more affordably, generally leading to increased economic activity, growth, jobs and wealth. Companies are more likely to pay down debt, invest, create jobs and grow, which usually leads to a rise in stock markets. Since bond markets typically have an inverse relationship with interest rates, bond prices can rise as interest rates fall. Cheaper mortgages also stimulate property markets.
A diversified investor with exposure to equities, bonds and real estate could really benefit from falling interest rates if this leads to higher portfolio values.
Cash savers, however, are put at a disadvantage as the interest they earn on bank deposits falls in line with central bank interest rates. Those who rely on cash deposits could notice a significant impact.
Cash deposit risks
When evaluating your investment returns, what is important is the real returns after accounting for inflation and tax.
Inflation is a ‘silent risk’, especially for those with large bank savings. Your balance may look safe but, in real terms, your savings are losing value. Many people also underestimate how much interest earnings are lost to tax (28% in Portugal). Your net return can be extremely modest or close to zero in real terms.
One final risk is protection – what happens if the bank holding your money fails? The EU and UK deposit guarantee schemes are limited to €100,000 (£85,000) per person per institution. If you’ve built up a sizable nest egg and hold it all with one institution, savings above that amount are essentially unprotected.
Your savings
You should always keep some money on deposit, for easy access to cash for day-to-day needs and emergency funds. However, relying heavily on it for retirement income carries some real risks. It is important for retirees to review their income strategy and explore whether a more balanced, tax-efficient option could provide better long-term returns and higher security.
The smarter approach is diversification – spreading your wealth across different types of investment assets. You can balance risk and return by holding a mix of assets such as equities for growth and bonds for stability, and do this in a way that shelters your earnings from tax.
Investment structures available to Portuguese residents provide access to a broad and well-diversified portfolio, and also offer real tax advantages. Depending on the jurisdiction, they can also provide a much higher level of investor protection than banks can.
Having the right wealth manager and strategic financial plan in place can provide peace of mind, estate planning advantages and reap financial rewards.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
These views are put forward for consideration purposes only as the suitability of any investment is dependent on individual circumstances; take individual personalised advice. The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.
Read Sharon Farrell’s last article: Is it time to consider downsizing your home?
