The Bank of England Cuts: What Lower Rates Mean for Savers

5 min read

On 1 August the Bank of England cut interest rates for the first time in more than four years. Bank Rate fell from 5.25% to 5%. Four days later global stock markets suffered their sharpest fall in years. Together these two events mark a turning point for anyone holding savings in cash. The era of easy returns on the bank balance is starting to end.

The first cut since 2020

The decision was close. The Monetary Policy Committee voted five to four in favour of the cut. It was the first reduction since March 2020, when rates were slashed at the start of the pandemic. Bank Rate had been held at 5.25%, its highest since 2008, for a full year.

The four who voted to hold were Megan Greene, Jonathan Haskel, Catherine Mann and Huw Pill. They preferred to keep Bank Rate at 5.25%. The minutes show services inflation was still 5.7% in June, unchanged from May. That is well above the 2% target, which is why some members wanted to wait.

The Bank's Governor, Andrew Bailey, was cautious. He said the Bank needed to make sure inflation stays low and to be careful not to cut interest rates too quickly or by too much. UK inflation was 2% in June, back at the target after peaking at 11.1% in October 2022.

The Bank also expects inflation to rise again to around 2¾% in the second half of this year. That would put it back above the target only months after reaching it. The next full forecast will come in November, after the Budget on 30 October, when the Chancellor sets out her plans.

The direction is now set. Markets expect further cuts over the coming year, in Britain and in America.

A sharp reminder of risk

The cut was followed by a rough few days. On Friday 2 August US jobs figures came in weaker than expected, with unemployment rising to 4.3%. Fears grew that the US Federal Reserve had kept rates high for too long.

On Monday 5 August markets fell hard. Japan's Nikkei index dropped 12.4% in a single day, its worst fall since the crash of 1987. Shares in London, Europe and New York fell too. Traders who had borrowed cheaply in yen to buy other assets were forced to sell at speed.

The size of the Japanese fall is hard to overstate. The Nikkei lost 4,451 points, the largest one day fall in points in its history. The previous record, 3,836 points, was set on 20 October 1987. The index closed at 31,458, some 27% below the peak it reached on 11 July. In less than a month it had gone from a record high into what markets call a bear market. The broader Topix index fell 12.2% on the day. Japanese bank shares fell 17%, the worst of the 33 sectors on the Tokyo exchange. Fox Business put the value lost from the July peak to Monday's close at about $792 billion.

The cause was a rush to unwind borrowing. The yen rose about 14% in less than a month, which made yen loans more costly to repay. On the Monday alone it rose 2.5% to about 143 yen to the dollar. One analyst quoted by Fox Business said traders had "leveraged up by borrowing in yen to buy other assets, chiefly U.S. tech stocks." When the yen jumped, those positions had to be closed at once.

Gold was not immune. In a panic, some holders sell whatever they can to cover losses elsewhere. Gold is among the easiest things to sell. It dipped with everything else. It then steadied quickly and is trading not far below the record it set in mid-July.

What lower rates mean for cash

For the past year cash savers have enjoyed something unusual. Interest on the best accounts ran ahead of inflation. That was a rare window. It is now narrowing.

Savings rates tend to follow Bank Rate down, often quickly. Mortgage borrowers welcome that. Savers do not. At the same time, prices are still rising. Inflation at 2% may sound low, but it still halves the buying power of money in around 35 years. If interest rates fall towards inflation, the real return on cash shrinks towards nothing. After tax on interest, it can fall below nothing.

There is also a deeper point. Central banks cut rates because their economies need support. Governments with large debts benefit from lower rates too. Britain's public sector net debt is close to 100% of GDP. The pressure on rates, over time, is downward.

Why falling rates have favoured gold

Gold pays no interest. When cash pays 5%, that is a cost of holding gold. When cash pays less, the cost falls. That is the simple reason falling rates have tended to support gold.

This year gold did not wait. It reached record after record while rates were still at their peak, driven by heavy central bank buying. We covered that in our May article on higher-for-longer rates. With cuts now under way, one of the main arguments against holding gold is starting to fade.

The latest figures from the World Gold Council, published on 30 July, show how strong demand has been. Total demand in the second quarter, including large private deals between buyers and sellers, was 1,258 tonnes. That was the strongest second quarter in its data series. Central banks added a further 183 tonnes. The average price in the quarter was a record $2,338 an ounce.

Not every part of the market was buying. Jewellery demand fell 19% on a year earlier as prices climbed. Demand for bars and coins eased 5% to 261 tonnes. Recycled gold rose 4%, its highest second quarter since 2012. The growth came instead from central banks and from large private deals, which rose 53% to 329 tonnes. That mix is why the price held up even as some shoppers stepped back.

Gold also brings something cash cannot. It is not a deposit with a bank and it is not a claim on any government. It cannot be diluted by a printing press. In a week when markets shook, that independence matters.

A calm view of a noisy week

Sharp falls in markets come and go. Rate cycles come and go. The long-term trend of paper money losing value has been far more consistent.

The lesson of 5 August is not that shares are bad or that gold always rises. Gold fell that day too, if only briefly. The lesson is that borrowed money and crowded trades can turn a calm market into a rout within hours. Savers who hold real assets outright, with no loan against them, are never forced to sell in a panic. That is one reason many people choose to hold part of their savings in physical gold.

UK legal tender gold coins such as the Britannia and the Sovereign give British savers direct ownership of gold. Gains on them are exempt from Capital Gains Tax for UK residents.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.