It has been a long time since savers have been able to earn the rates they can now from banks and building societies. But will it last? In the space of a year, rates have gone from the doldrums to fairly decent – albeit still far behind inflation – as providers battle for business.
But with the economy stabilising, many banks and building societies are rowing back on headline-grabbing offers – meaning consumers will have to act quickly to take advantage.
“Fixed-rate savings seem to have peaked, as the best rates available continue to drop,” says Sarah Coles, personal finance analyst at investment firm Hargreaves Lansdown. She adds: “Those who were hoping this was the start of a glorious run of rising rates are set to be disappointed, because they are inching downwards – and are likely to keep doing so.”
What a year
The last 12 months have seen a complete about-turn as the Bank of England acted to combat inflation.
Anna Bowes, co-founder of website Savings Champion, says these shifts had a significant impact. “Just over a year ago, when the base rate was still at 0.1%, the best easy-access account was paying about 0.71% – today, Cynergy is offering 2.9%,” she says.
“If you have £50,000 in an account paying 0.71%, that would produce interest of £355 a year. At 2.86%, say, your £50,000 would earn £1,450 a year.
“If we look at fixed-term bonds, the returns you can expect today, compared with a year ago, are equally impressive. If you have a one-year bond maturing now, and are looking to roll it over, the return this year could be as much as 4.33% (on a 12-month Sharia account from Habib Bank AG Zurich), as opposed to 1.41% last year. So, rather than £705 gross, you can look forward to £2,165 in a year’s time,” says Bowes.
Figures from financial data site Moneyfacts show average returns have shot up, even since September: from 0.85% to 1.63% for a no-notice savings account; from 2.33% to 3.59% for a one-year fixed product; from 2.51% to 3.84% for a two-year fixed-rate; and from 2.95% to 4.07% for a five-year fixed product. These are based on accounts with £10,000 in them.
So what has changed?
The later months of last year saw volatility in the market, with uncertainty about rates after the September mini-budget, and lenders going into competition with each other to attract money. But since then markets have calmed, with expectations inflation has peaked, and the perception that rates will stop rising once they get to perhaps 4.5%, says Coles.
“Compared to mid-October, the best fixed-term rates have fallen across the board. The best one-year fix is down from 4.7% to 4.33%; the best over two years from 5% to 4.7%; the best over three years from 5% to 4.56%, and the best over five years from 5.1% to 4.6%.”
Rachel Springall at Moneyfacts says that while some savers may be disappointed at the slowdown, it shows stability has returned to the market. “As uncertainties surrounding interest rates calm, so does the competition at the top end of the market, and this has led to cuts, and even withdrawals of some of the best fixed rates,” she says.
What is to come?
With the new calm, Bowes says we are likely to have seen the highest rates that bonds have to offer.
“There is a general feeling that, even though there could be a couple more base rate hikes to come, these are already being priced into the fixed-term bond rates, and therefore we’re unlikely to see rates rising a great deal more, if at all,” she says. “Variable rates, on the other hand, tend to be more reactive to the base rate as it happens, so hopefully those on easy-access and notice accounts will see a further push upwards.”
She says variable rates include notice accounts, which have been very strong recently. “Hinckley & Rugby building society has a 3.6% 120-day notice account – the rate was increased last week.”
There is still value out there – certainly compared with a year ago – but it could now be a question of for how long. And Coles says some accounts could help savers come close to matching inflation.
“While those between 4% and 5% don’t sound very exciting when you consider inflation is still running at over 10%, it’s worth bearing in mind that inflation looks backwards, and rates look forward, so you don’t need 10% to beat inflation,” she says.
“City forecasters estimate that inflation will be about 5.2% later this year, and that it’s expected to continue falling in 2024. It’s always incredibly difficult to forecast, but if these estimates are right, you could get close to matching inflation over one year, and may even keep up over two years.
“There’s a decent chance of a further fall from here, so if you were weighing up the best moment to fix, it might be worth considering doing so sooner, rather than later.”
Bowes says not all providers behave in the same way, so consumers should ensure they are aware of all the rates on offer.
“It’s important not to simply assume your bank or building society is treating you fairly, so check what you are earning and shop around to see if you can put more precious pounds in your pocket.”
Best rates on offer
Easy access: HSBC – 2.97%
Notice: Hinckley & Rugby Building Society – 3.6%
One-year fixed-rate bond: Habib Bank AG Zurich – 4.33%
Two-year fixed-rate bond: FirstSave – 4.7%
Three-year fixed-rate bond: Investec Bank (Raisin UK) – 4.71%
Four-year fixed-rate bond: UBL UK – 4.53%
Five-year fixed-rate bond: UBL UK – 4.63%
Source: Moneyfacts, based on a £10,000 investment. All products and rates correct at time of writing.