Savings rates double but still lag inflation
In spite of the best fixed rate savings accounts doubling the interest payable over the past 12 months, there is still no account that offers cash savers protection from rapidly rising prices, Moneyfacts figures out today show.
Rachel Springall, finance expert at the price comparison site, said given that savings rates fell to record lows last year when the Bank of England base rate was 0.1%, “seeing such vast improvements across the top rate tables since then is reassuring”.
But she added: “Inflation is dampening progress as not one standard savings account can outpace its current level.”
Savers who are committed to depositing into a cash account could look at one-year fixed rate bonds, Springall suggested, with the top rate deal from Gatehouse Bank paying 2.75% for those able to deposit a minimum of £1,000 – more than twice the top deal a year ago which paid 1.10%.
“Fixed bonds and fixed ISAs overall are seeing improvements across all terms, and this competition has been predominantly fuelled by challenger banks jostling for a prominent position to entice savers’ deposits,” she said.
Easy access savings accounts have also seen rates climb since the Bank of England began to raise the base rate from its historic low of 0.1% in December last year. It now sits at 1.25% and markets expect a further 0.5% rise to be announced after August’s Monetary Policy Committee meeting.
The top easy access account is currently from Sharia-compliant Al Rayan Bank and pays an expected profit rate of 1.6% on balances from £2,500 upwards.
“While this is positive, the stark reality is that inflation is eroding the real spending power of consumers’ cash and is expected to remain at a high level for some time,” Springall said.
The Bank of England is forecasting inflation to top 11% by the autumn, driven by a massive expected rise in the energy price cap from October.
Analysts at Cornwall Insight now predict the cap to jump by a whopping 65%, taking the average household energy bill to £3,244 a year.
Although the Bank of England predicts inflation to drop back after this, levelling out at around 6.6% during Q2 2023, it offers little respite for cash savers.
Earlier this week research house Capital Economics updated its forecasts, with analysts now expecting the base rate to hit 3%.
Springall said given the prospect of further base rate rises this year, savers should think carefully about locking cash into longer term fixed rate bonds.
She added: “Spreading cash across both easy access accounts and short-term fixed rates to secure a guaranteed return could be a wise move to get the best of both worlds.”
Not all easy access accounts allow unlimited withdrawals and, in some cases, heavy bonuses can apply for just 12 months.
Cynergy Bank is currently offering an easy access rate of 1.46% with a £1 minimum deposit, but with the bonus rate of 1.16% dropping off after the first year Springall recommends making a note to switch deals before they expire.