Interest rates drop to 4.25%! Can I now earn more with a Cash ISA or a Stocks and Shares ISA?
On 8 May, the Bank of England lowered interest rates once again. The fourth cut in less than a year means those of us with a few quid in a savings account or a Cash ISA are getting less money back than we used to. We might also be wondering whether nowâs the time to reallocate some of that capital to other investments, such as a Stocks and Shares ISA, for a better overall return.Â
Personally, I have some savings in both of these accounts. Hereâs what I plan to do, along with my general thoughts on the matter.
Rates are falling
The first thing is to address that a 0.25% cut is small beer, not an amount most will notice. For a yearâs maximum deposit of £20,000 in a Cash ISA that only works out to £50 yearly. What matters though, is the general trend. Rates peaked at 5.25% over several months in 2023 and 2024 and have been slowly falling since.Â
The markets currently expect two more rates cuts this year, which means rates are heading for 3.75% by the end of the year and likely lower in the years ahead. Compare that to inflation which is at 2.6% and rising. As such, real gains in Cash ISAs are going to be small. Iâll be keeping minimal amounts in my Cash ISA going forward.Â
Where will I put any excess cash for the best rate of return then? Well, the answer is, as it’s always been, in the markets. Companies that are able to invest and grow have always tended to offer the best chance for big returns. It does mean grappling with a couple of downsides like volatility and risk. Seeing your net worth jump up and down on a daily basis is not for the faint of heart!
In good shape
But for anyone looking to get involved with a Stocks and Shares ISA, now might be a great time to do so. Ongoing cuts to interest rates let companies borrow, pay debts and invest more easily. Sectors like housebuilding will get a bump from cheaper loans too. Leading indexes like the FTSE 100 and S&P 500 are in pretty great shape anyway, both a few percent from their all-time highs with the threat of Trump tariffs seemingly in the rear-view mirror.
One stock I think investors could consider for a Stocks and Shares ISA is Rolls-Royce (LSE: RR). The engineering giant doesn’t seem to get tired of winning. The stock posted monster years in 2023 and 2024. Time for a pullback? Nope. The share price is up 38% year to date. Its products in areas like defence, engines and power systems are all robust industries with good long-term prospects and high barriers to entry â all things I look for in a company.Â
And Iâm particularly excited about SMRs, the mini nuclear power stations that could be the future of clean energy generation. Rolls-Royce has a leg up over the competition, having worked on similar designs for Royal Navy submarines since the 1950s.
As for risks, high energy costs in this country and increased wage costs are both issues to be concerned about. My guess is they will be temporary speed bumps for an otherwise great company.
The post Interest rates drop to 4.25%! Can I now earn more with a Cash ISA or a Stocks and Shares ISA? appeared first on The Motley Fool UK.
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More reading
- Is the Rolls-Royce share price still a bargain in 2025?
- £10,000 invested in Rolls-Royce shares after âLiberation Dayâ is now worthâ¦
- Here’s what £10,000 in Rolls-Royce shares today could be worth in 2 years
- £10,000 invested in Rolls-Royce shares before the tariff news is now worth…
- Hereâs how much £11,000 invested in Rolls-Royce shares a year ago would be worth todayâ¦
John Fieldsend has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
