It’s been a tough 10 years for UK savers as interest rates have remained at rock-bottom, and the rates offered on easy-access savings accounts have been truly abysmal.
Yet recently, we have seen signs that the outlook for savers is improving. UK interest rates were lifted to 0.75% in August, and it’s now possible to find rates of around 1.5% on easy-access savings accounts.
So, what does the future hold for UK savers? Could we see easy-access savings account rates rise to 2% next year?
Interest rates are rising
The global economy has shown that it has recovered from the Global Financial Crisis a decade ago and that means interest rates in some countries are now on the rise, which is good news for savers.
For example, in the US, economic growth is strong and unemployment is at 48-year lows, and as a result, the Federal Reserve is hiking rates rapidly. The US has already had three rate hikes so far in 2018, and economists expect another in December, as well as two to three in 2019. With interest rates up sharply over the last two years, US savers can now pick up savings rates of over 2% on their money.
However, the situation is a little more complicated here in the UK, due to Brexit uncertainty. Right now, no one has any idea how Brexit will play out or how it will impact economic growth, unemployment or inflation. As such, it’s likely that the Bank of England could be cautious when it comes to lifting interest rates again, until there’s more clarity on Brexit.
Having said that, UK wage growth is strong right now and inflation is higher than the Bank of England’s 2% target, and therefore, some economists believe that we could potentially see another two interest rate increases in 2019. That would be good for savers as interest rates on easy-access savings accounts would most likely rise.
Could we see easy-access rates of 2% here in the UK next year? Personally, I think it’s unlikely. I wouldn’t rule out the chances of this happening completely, but for 2% to be offered from UK banks I think we’d have to see a combination of very strong economic conditions, a number of interest rate increases from the Bank of England, and an ‘interest rate war’ between the banks. Not impossible, of course, but also not the most likely scenario, in my view.
However, it’s worth pointing out that there are other ways to earn higher returns on your money. One example is dividend stocks. These are companies that pay their shareholders regular cash payments out of their profits. And the good news is that right now, it’s possible to pick up some amazing dividend yields from well-known FTSE 100 stocks. For example, oil giant Royal Dutch Shell currently offers a yield of around 6% which is approximately four times the best easy-access rate.
Of course, stocks are higher risk than savings accounts. With stocks, your money will fluctuate in value and you might not get back what you put in. Dividends are not guaranteed either. Yet when you consider that any money earning 1.5% in a savings account is actually losing purchasing power over time due to inflation – which is a risk in itself – dividend stocks could be worth a closer look in the current low-interest rate environment.
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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.