Got a question about your savings? Email in and we’ll get one of our experts to reply. Anna Bowes, co-founder of Savings Champion, has given her guidance to a reader below. If you have a question for our experts, email us at [email protected].
Question: Earlier this year, there were predictions the Bank of England would drop its interest rate by around this time, and therefore savings rates started to fall. But they haven’t fallen – yet savings rates seem to have gone down anyway! Is there a chance they now start to go back up? I am wondering if should go for a longer-term bond or not?
Answer: The Bank of England uses interest rates as a tool for managing inflation. The theory is that if interest rates are higher, they reduce how much is spent in the UK, because it’s more meaningful to save and more expensive to borrow – and when overall spending is lower, prices stop rising so quickly.
And it seemed to be working. Inflation has fallen to its current level of 3.2 per cent – down from a high of 11.1 per cent in late 2022 – but it is still higher than the 2 per cent target. Inflation is proving to be a little stickier than hoped and as a result the expectation for when interest rates can be cut has been pushed back.
Fixed term bond rates tend to react to market expectations rather than actual base rate changes, so when the markets were expecting an imminent cut, the top fixed rates on offer did too. But, as the expectation for the base rate cut has been pushed back, we’ve actually seen an increase in the rates of some of the top fixed rates available.
What is interesting is the fact that longer term bond rates are lower than shorter term – you’d normally expect to be rewarded for tying your money up for longer.
But this unusual situation is a clear indication that the next move for interest rates is likely to be downwards. And just because the rates are lower, this doesn’t mean you should ignore the five-year bonds; whilst the shorter-term higher rates look much more attractive at the moment, what will be available in a year’s time, when that bond matures? And the year after?
With any cash that you can tie up for longer, whilst you might be earning less interest immediately, with inflation falling it would be good to think that this cash could be earning an interest rate that is higher than inflation for longer – something that is rarely the case.
A balanced view is probably sensible; tie up some for longer to hedge against interest rate cuts in the future, whilst taking advantage of the higher shorter-term rates too. And then choose the best easy access accounts for any money you might need to get hold of in a hurry.
At the moment, with inflation falling you should be able to find accounts that are keeping up with the cost of living, even if you pay tax on your savings.
