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Will the Bank of England Base Rate rise and is this good for savers?

At the time of writing, the financial markets are pricing in a 90% likelihood that the Bank of England will raise the base rate from its current level of 0.50%. Base rate hasn’t been above this level for almost a decade – since March 2009. Back then, savers could earn over 6% for putting their money away for a year and 7% for five years. How savers would love a return to those days!

By the time you read this, we will know whether the Bank of England’s Monetary Policy Committee (MPC) voted to raise base rate at its August meeting. Last month saw a 6-3 vote against a rise and we expect the August vote to be a close call. We have a nagging feeling that we may see another month with the base rate unchanged, with concerns about the economy and Brexit being enough to see another month of hold.

Regardless of which way the MPC vote, a base rate increase is on the cards very soon. Those with mortgages know that this means an increase in repayments – with those on fixed rates knowing that this only buys them time before an increase hits.

What does it mean for savers? This was a question I covered with Simon Read in the Daily Mirror on 31st July. Roll back a decade and the interest rates on savings broadly followed changes to Bank of England base rate. Banks and building societies were often guilty of passing on rises to mortgage holders immediately and somewhat later to savers but there was certainly a correlation.

Over the past few years, there’s been a complete decoupling of any connection between savings rates and Bank of England base rate. The government has pumped money in to banks through its Funding for Lending and Term Funding Schemes which has reduced appetite from the larger banks and building societies to price competitively to attract deposits from savers.

The void has been filled by a raft of new banks who have entered the savings market since 2009. We’ve seen almost 40 new providers join the savings market in the UK. These banks have competed strongly on price and their demand for savings to fund their lending businesses has spared savers from even worse rates from the historic lows witnessed.

It is this competition and demand which is driving savings interest rates and we see little reason why this will change, regardless of any base rate rise, as it has been completely out of sync with base rate for several years. The larger banks and building societies still have more savings deposits than they need and we think they are likely to pass on little or none of the benefit of any base rate increase to their savers, instead using it as an opportunity to improve their profits.

Savers hoping for a base rate increase to improve their returns are therefore likely to be disappointed.

Will the regulator intervene in the savings market?

At the end of July, the Financial Conduct Authority (FCA) issued a discussion paper ‘Price discrimination in the cash savings market’ looking for feedback on various ways it could improve competition in the market. Its chief proposal is to introduce a basic savings rate (BSR) to savers with easy access savings accounts and easy access Individual Savings Accounts (ISAs).

There is over £1.5trillion of savings in the UK and around half of this is held in either easy access accounts or easy access ISAs. The FCA has found that savers who have held their account for over five years are earning on average 0.82% less than those who have opened their account in the previous two years. In the case of ISAs, the difference is 0.87%.

Given that 45% of customers have held their savings account for more than five years, a large number of savers are significantly worse off compared to those who have switched recently. Contrary to popular opinion, loyalty from long term savers is not being rewarded.

We will be covering the discussion paper in more detail shortly in a blog on our website. However, we are keen to see savers share their views with the FCA – either directly to the regulator, or with us, which we will collate and provide with our response.

In the meantime, our top six best buys for easy access all pay between 1.25% – 1.31% and we are aware of over twenty accounts in the market paying 1% or more. If your easy access savings are not achieving at least this, we strongly recommend moving them to get a better return on your hard earned money. Don’t wait in hope of a base rate rise or regulatory intervention improving the interest you earn!

Business savings rates covered and improvements to the website

We’ve been busy making a number of enhancements to our website to help savers. We now cover business savings accounts – easy access, notice and 1 Year Fixed rates – including which types of companies qualify for these accounts.

The number of providers covered in our best buys has increased to six in every product category and we have also become the first savings website to provide dedicated coverage to 18 Month Fixed Rate Bonds with their own category. There’s more to come over the summer too!

The market can move quickly, so we always recommend that you check our website for the latest rates. At time of going to print, our best paying personal savings rates are:

Term

Interest Rate

Provider

Instant Savings

1.31%

Paragon Bank

Notice

1.78%

Secure Trust Bank

1 Year

2.05%

Atom Bank and Bank of London & Middle East

18 Months

2.10%

Bank of London & Middle East

2 Year

2.20%

BM Savings, Hampshire Trust Bank, Investec Paragon and Bank of London & Middle East

3 Year

2.35%

Hampshire Trust Bank, Gatehouse Bank and Bank of London & Middle East

4 Year

2.51%

Secure Trust Bank

5 Year

2.70%

Bank of London & Middle East

That’s all for this month. Have a fabulous August and see you again in September.

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James has a monthly column in Around Town Magazine, which goes out to 50,000 homes in Essex. July’s column is reproduced here for website readers with links to the sources and providers mentioned in his column.

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We write a monthly column in Around Town Magazine, which goes out to 50,000 homes in Essex. This month’s column is reproduced here for website readers.

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There’s been lots of media commentary this month about savings rates being at the highest level since 2015 and suggestions that this will continue through the year.

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In our latest video about savings, James Blower explains how the Financial Services Compensation Scheme protects savers deposits with banks, building societies and credit unions

 

 

 

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James Blower explains the Personal Savings Allowance in his latest video.

 

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James Blower of The Savings Guru explains why he's such a massive fan of regular savings accounts.

 

 

 

 

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Each month we write a column in Around Town Magazine, which goes out to 50,000 households in Billericay, Rayleigh and Upminster in Essex. Here’s our April column.

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