A leading expert has warned that we may now have passed “peak savings rate”, and returns on cash deposits are more likely to fall rather than rise.
Those who have been putting off locking into a best buy fixed-rate bond in the hope of getting a higher rate in the weeks ahead should reconsider their decision.
The BoE’s monetary policy committee (MPC) has steadily increased base rates since December 2021, when they stood at just 0.1 percent.
It has done this to drive down inflation, even at the risk of plunging the economy into recession.
This is bad news for homeowners, who have seen mortgage payments rocket, but good news for savers who are finally seeing a decent return after years of getting next to nothing.
Sadly, with inflation into double digits, their deposits are still declining in real terms.
Base rate currently stands at 3.5 percent but the MPC is expected to increase this by another 0.5 percent at its meeting on Thursday, February 2.
This will push base rate up to four percent, but savings rates may not necessarily follow.
Returns on fixed-rate bonds peaked more than a month ago and are unlikely to climb much higher now, warned Andrew Hagger, savings expert at MoneyComms.co.uk.
Last year, the very best one-year fixed-rate bond from RCI Bank paid savers an impressive 4.60 percent.
The top five-year fixed rate bond from Gatehouse Bank paid 5.10 percent a year, with United Trust Bank close behind with 5.05 percent.
Savers cannot hope to get anything like those rates today.
Moneyfacts tables show the current best buy one-year bond is offered by Shawbrook Bank and pays just 3.95 percent.
A saver who put £10,000 into Shawbrook’s bond would earn £395 in a year. Last year, they could have got £460 from RCI, worth £65 more.
The loss on a five-year fixed rate bond is even greater.
Somebody who put £10,000 into the Gatehouse bond at 5.10 percent would have got a total return of £12,824 after five years.
By contrast, Ford Money’s market-leading five-year fixed-rate bond would give them £12,402. That is £422 less in total over the term of the bond.
We have now passed “peak savings rate” and fixed-rate bonds will not climb much higher even if the BoE does hike bank rate tomorrow, Hagger said.
“Last year, City analysts and economists thought base rates must hit six percent to bring down inflation. Today they reckon bank rate may not rise above 4.5 percent.”
READ MORE: UK’s ‘best buy savings account’ turns £10k into £12,402
By the end of 2023, the MPC may be cutting rates instead. Banks and building societies are playing safe by cutting rates rather than raising them, especially on longer-term three, four and five-year fixed rate bonds.
Two-year fixed-rate bonds still look competitive with Ford Money paying 4.25 percent, only slightly lower than its five-year rate.
While falling interest rates would be good news for the economy it would be a blow for savers. Their only hope is that inflation falls sharply, too, eroding the value of their savings at a slower pace.
One type of savings product will benefit if the BoE does hike tomorrow, Hagger said.
He reckons this will help boost easy access savings rates, which are much more exposed to base rate movements.
Currently, Shawbrook Bank pays a market-leading 2.92 percent on easy access.
Easy access rates could climb towards 3.5 percent in the days ahead, offering some consolation.
Deciding which savings accounts to opt for is tricky and impossible to get completely right. “Consider a mix of short-term and longer-term bonds to spread your risk,” Hagger said.
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