FINANCE
EXPERT COMMENT While banks are very quick to pass on any Base Rate increases to their mortgage customers, savers have to wait longer and many won’t see any increase at all. Lots of people’s savings are just sitting in their current account or old savings account, earning 0.01%. And these people likely won’t see an increase in the interest rate they’re
Upwardly mobile Interest rates are going up. Kay Hill looks at how the news affects your housebuying journey
being paid, instead banks will pocket the difference. However, the best buy rates will improve, which means that savers can finally get a bit more money on their cash, but they’ll need to put in some legwork. However, savers are still losing a large amount thanks to inflation. Inflation is expected to rise to 8%, which means that with a savings rate of 1% savers are making a 7% loss
After more than a decade of interest rates sitting at rock bottom, there is no doubt now that they are on the rise. At the February meeting of The Bank of England’s Monetary Policy Committee (MPC), the Bank Rate (also known as the base rate) was increased from 0.5% to 0.75%, and at the May meeting it was increased yet again from 0.75% to 1%, bringing it to the highest level it has been for 13 years. The Bank Rate is the rate of interest that the Bank of England pays on balances held by commercial banks and building societies, so any changes influence the rates that those institutions offer their customers in return. The increases in the base rate means, in essence, that borrowers will pay more while savers will receive more in interest, although the changes are seldom passed on fairly!
JOY FOR SAVERS? If you were hoping for an immediate boost to your deposit savings then you will be sadly disappointed. A survey by Defaqto after the February rate rise found that less than half of
banks and building societies put their savings interest rates up at all, and only one in 10 passed on the full 0.25% increase. Many of the biggest banking names are still paying derisory 0.01% rates on easy access and current accounts. However, overall rates have been creeping up – at the time of writing it was possible to get an easy access account paying 1.5% through the Chase app, 2.25% on a one-year fix with Investec and 2.55% with PCF Bank on a two-year fix. Nonetheless, when inflation is taken into account, even the best interest rate means you are still losing money. “On the face of it a rate rise looks good for savers, but high inflation spoils the party,” explains Becky O’Connor, Head of Pensions and Savings at interactive investor. “Savers and investors are damned if they do and damned if they don’t. Every option seems to have a downside. Decisions on where to keep money may ultimately come down to what looks like the least bad option. “People can either leave their money at the mercy of inflation in savings or in investments at the mercy of global stock market volatility, caused
on their money’s spending power – someone with £20,000 of savings is losing £1,400 a year. Some might be tempted to fix their money to get a higher rate. For example, the top two-year fix pays almost double the interest of an easy-access account. But savers need to seriously consider what interest rates will do and if that deal will look attractive in a year or two’s time. Markets are expecting more increases and for rates to be sitting at 1.75% by the end of 2022. If that’s the case, anyone who has fixed won’t be able to benefit. Laura Suter, Head of Personal Finance, AJ Bell
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