Savers grew used to getting little or nothing on their money when interest rates were slashed almost to zero after the financial crisis. That dramatically changed, with the Bank of England hiking base rates from just 0.1 percent in December 2021 to today’s five percent.
The BoE is expected to hike rates again at its next meeting on August 3, possibly to 5.5 percent as it continues its losing battle against inflation.
Markets now expect bank rate to peak at 5.75 percent. Despite this, today’s six percent-plus deals are living on borrowed time.
By the spring, the BoE could be cutting rates rather than increasing them. Banks and building societies don’t want to lock into paying six percent at a time when interest rates are plunging back towards two percent again.
They have already started pulling rates in anticipation.
Last week, I reported that Vanquis Bank has launched a market-leading two-year fixed-rate bond paying 6.2 percent a year.
That’s since been pulled.
Until recently, another challenger bank, FirstSave, was still offering a two-year fixed-rate bond paying 6.15 percent a year.
That’s gone, too.
This is hardly the end of the world. Beehive Money and the Melton Building Society both pay 6.10 percent a year over two years.
Yet the direction of travel is clear, says Anna Bowes, savings expert and founder of rate tracking service Savings Champion. “The best may now be over for savers.”
Once rates start falling, they could return to previous lows and stay there for the foreseeable future. Although interest rate movements are hard to predict, today could be a once-in-a-decade chance for savers.
Bowes says that anybody who assumes savings rates will keep rising may be in for a rude awakening. “The frenetic upward pace of the fixed-rate bond market has slowed over the last couple of weeks and perhaps even peaked.
“This indicates that financial markets feel we are near the top of the interest rate cycle.”
Savers who want to get six percent or more may have to act fast, Bowes adds. “Savings rates could even start to fall once the BoE feels that inflation really is under control again.”
This may seem odd, given that the BoE still looks set to hike base rates in August, September and possibly even November as well.
However, banks price their fixed-rate bonds on where they think interest rates will be further down the line. Here the outlook is very different, judged by something called the Sterling Overnight Index Average (Sonia).
These reflect how much interest banks must pay to borrow sterling from other financial institutions, Bowes says.
“One-year Sonia rates have fallen from 5.842 percent a month ago to 5.705 percent. Five-year rates have fallen much further to just 4.739 percent, which are reflected in today’s fixed-term bond rates.”
Normally, long-term bonds pay more interest to reward savers for locking in, but that’s not the case as banks anticipate falling rates from 2024. “It’s really unusual for longer term bonds to be paying less than short term,” Bowes says.
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While the odd “surprise account” pops up from time to time, Bowes say, they often don’t last long because they are overwhelmed by demand from savers.
On five-year fixed rates, RCI Bank continues to pay a generous 5.80 percent a year. This could soon prove an inflation-busting return if inflation continues to fall from today’s 7.9 percent, as expected.
Hampshire Trust Bank is close behind paying 5.75 percent a year over five years, but there is no guarantee these rates will last for long.
However, rates on easy access accounts should continue to rise if the BoE does hike bank rate as expected next Thursday and beyond.
Paragon Bank currently pays 4.60 percent on easy access, followed by OakNorth at 4.56 percent and Charter Savings Bank at 4.55 percent.
These best buy easy access rates are highly attractive but they could be cut just as quickly when interest rates fall, while the interest on a fixed-rate bond is guaranteed to term.
As we discovered 18 months ago, interest rate expectations can quickly change and savings rates soon follow. We could be heading for another turning point soon
