Interest rates offered to savers have been in the doldrums following the financial crisis, but Covid added another problem into the mix.

In an unprecedented move, the Bank of England cut the base rate to a historic low of 0.1% in March 2020 at the onset of the pandemic.

Since then, savers have faced even lower rates of interest until the base rate started to rise in December 2021 as inflation started to creep up, later heightened by the Russian invasion of Ukraine.

In the last six months, the bank rate – which influences the savings rates offered by providers – has risen five times from 0.1% to 1.25% currently. However, at the Bank’s next meeting on 4 August 2022, it is forecast to rise 50 basis points to 1.75%.

Different dilemma amid fierce competition

Given the rising rate environment, savers are now facing a “different dilemma”, according to Andrew Hagger of financial media service Moneycomms. That is, whether they should open a fixed rate savings account – locking their money for months or years – potentially missing out on better, higher interest paying accounts as and when they’re launched.

Hagger says: “It’s nice for savers to experience rising rates for a change but it does present a different dilemma – everybody wants to lock into the best deal they can, but they fear they may miss out by investing too early.”

Last month a saver told YourMoney.com it was “a shame” they had taken out Atom Bank’s one-year fix offering 2.3% when just two days later the rate rose to 2.4%. But they added: “Never mind, it is what it is.”

Indeed, data from Moneyfacts revealed the top fixed rates now pay double what they offered savers last year. As an example, in July 2021, the top one-year fixed rate bond paid 1.05%. Today, savers can get 2.75% AER/Gross (minimum £1,000) with Tandem, or an expected profit rate of 2.75% from Sharia-compliant Gatehouse Bank (£1,000 minimum deposit).

And the pace at which they’re changing is also on the up. James Blower, founder of The Savings Guru says in a week it saw 10 new best buys compared to the previous week, adding “every week there’s been a minimum of six new best buys”.

Hagger says: “At the moment competition in the savings market is fierce and the more niche savings providers are helping to keep rates creeping up.

“Paragon Bank is one of the more active savings providers – along with Aldermore, Zopa, Cynergy Bank and Yorkshire building Society – and has increased the rate on its one-year fixed rate bond four times in 10 weeks so it highlights the competitive nature of the market.”

Lock away cash for longer?

While this is great news for savers, the dampener is inflation which came in at 9.4% for June, eroding the purchasing power of cash. It is expected to breach 11% later this year.

Nonetheless, savers looking to gain the most interest on their cash will be paying attention to fixed rates, particularly with any spare cash they have once they’ve factored in the current cost-of-living crisis.

Hagger believes savings rates will increase further in 2022 and into 2023 but some of the anticipated rises may already be priced in.

Blower says that while one-year rates have doubled in a year, he doesn’t believe the market will see the same levels of growth in the next six months.

He says: “One-year rates are nearly double the best easy access rates and that makes them worth considering for savers. However, beyond that, there’s not enough premium to lock away for longer in my opinion.

“Trying to time the market is really hard and, as I think the rate of increases will slow, savers looking to drip feed in to fixed deposits may find that the interest they miss out on by staying out is greater than any benefit of a higher rate they might achieve.”

This is echoed by Hagger, who says: “If you’re delaying opening a fixed rate account until better rates are available, you can run into a number of problems.

“Whenever you fix, there’s a reasonable chance that something will come along tomorrow that’s more generous.

“If you decide to wait for the top of the market, you don’t know how long you will be waiting, and you won’t know you’ve reached the top until it passes and so you may not get the highest possible rate.”

The options for savers

Rachel Springall, finance expert at Moneyfacts says spreading cash across both easy access and short-term fixed accounts to secure a guaranteed return could be a “wise move” to get the best of both worlds.

However, she warns: “Savers who are comparing easy access accounts must be mindful that not all of them allow unlimited withdrawals and, in some cases, heavy bonuses can apply for just 12 months – so it’s wise to make a note to switch before they expire.”

One option for savers is to fix some money now and then again in another month, according to Hagger.

He says: “Opening a number of fixed rate products across a period of a few months means your average rate will be reasonable and well above the best easy access rate.

“If you have a portfolio of savings bonds maturing say every few months, it does give you some flexibility.”

Meanwhile, Blower recommends people look at savings clubs or platforms which often run cash incentives.

“New Raisin customers get £25 via Savings Guru which equates to another 0.25% on a £10,000 deposit. It’s also worth keeping an eye on current account switching incentives too e.g. both First Direct and Halifax are paying £150 to switchers. Chase offers 5% interest on savings rounds ups plus 1% cashback on card spending.  So there are things that savers can do to maximise their finances from banks.”

Ultimately though, “it depends on the individual; how long you want to or are able to lock your money away for”, Hagger says.

Here are the current best buy rates, according to Savings Champion:

One-year fixed rate bond: Tandem One Year Fixed Saver 2.75% AER/Gross (min. £1,000) via app/online
Two-year fixed rate bond: DF Capital 2 Year Fixed Rate Deposit (Issue 8) 3.10% AER/Gross (min. £1,000)
Three-year fixed rate bond: DF Capital 3 Year Fixed Rate Deposit (Issue 2) 3.20% AER/Gross (min. £1,000)
Four-year fixed rate bond: Aldermore 4 Year Fixed Rate Account 3.20% AER/Gross (min. £1,000)
Five-year fixed rate bond: PCF Bank 5 Year Term Deposit (Issue 36) 3.45% AER/Gross (min. £1,000)
Easy access account: Al Rayan Bank Everyday Saver (Issue 3) expected profit rate 1.60% AER/Gross (min. £5,000).

Related: See YourMoney.com’s The top paying savings accounts which is updated monthly with the best buys across easy access savings, bonds and ISAs.