If you have savings, finding a decent interest rate for your cash is no easy feat at the present time. Yet interest rates are slowly rising, so if you’ve money searching for a home, it’s worth knowing where you should stash it…
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What you need to know
In March 2020, the Bank of England slashed its base rate from 0.25% to 0.1% in response to the coronavirus crisis.
The base rate is now at its lowest in history – an astonishing statistic when you consider the Bank of England has been in existence for over 325 years!
In 1979 the base rate was a whopping 17% and, as recently as 2007, stood at a hefty 5.75%.
The Bank of England says the reasons behind its decision to cut the base rate to close to zero was to reduce costs faced by businesses and households, plus minimise the longer-term damage to the economy following the pandemic.
What’s the real-world impact of a low base rate?
Today’s low base rate certainly makes it cheaper for businesses to lend money, which can be a boon for those looking to remortgage or obtain credit.
However, if you’ve savings it’s a different story…
With an exceedingly low base rate, retail banks can now borrow for next to nothing. That means they’ve little incentive to offer you a decent return for holding your cash.
We’ve seen this proven comprehensively over the past 12 months or so. In January 2020 the top easy-access savings account in the UK offered 1.41% (AER), with the top one-year fixed savings account paying 1.65%. In March 2020, following the base rate reduction, the top easy-access rate dipped to 1.31%, while the top fixed one-year rate fell to 1.6%.
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2021 didn’t start well for savers either. In January, the top easy-access account offered a pitiful 0.55%, while the top one-year fix stood at 1%. By March, the best-buy rates plummeted further, with 0.5% on offer for easy-access and just 0.58% for a one-year fix.
Yet things are now (finally) beginning to look a little brighter for savers. May 2021 has seen savings interest rates creep up, with the top easy-access rate jumping from 0.4% to 0.5% in recent weeks, while the top one-year fixed rate has risen from 0.7% to 0.86%.
This upward trajectory is reportedly being driven by the UK’s demand for mortgages. And while current savings rates are nothing to write home about, they do signify that they are heading in the right direction.
Will savings interest rates continue to rise?
That’s difficult to answer, but with the Consumer Price Index suggesting inflation had risen to 1.5% in April (up from 0.7% in March), a continued move in this direction may put pressure on the Bank of England to increase its base rate to avoid the economy overheating. The Government has an inflation target of 2%.
However, the Bank of England may choose to ignore a pickup in inflation for a multitude of reasons – including using it as a way of inflating away Government debt following its significant stimulus actions as a result of the pandemic. So don’t ‘bank’ on this happening.
Should I invest instead?
If you’re willing to take the risk of achieving higher returns then investing is certainly worth considering.
This is especially true if you’re able to put away money for the long term. That’s because while stocks and shares can be volatile, they traditionally outperform cash in savings accounts over an extended period of time (though there’s no guarantee they will do so in future).
You can also invest in an ISA too, making it easy to protect your investments from the taxman.
If you want to go down this route, it’s worth getting your head around the investing basics first.
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