🔔 Base rate is cut, but best buys defy gravity

The Bank of England’s Monetary Policy Committee (MPC) gathered earlier this month to make the penultimate base rate decision of the year – and as was widely expected, it was cut by 0.25%, from 5% to 4.75%

However, whilst there was a consensus that this move would be made, some of the policies announced in the Budget could boost inflation once again and therefore it is now in question about whether there will be another cut at the last meeting of 2024, in December. It now feels as though this is unlikely.

As a result, savings rates as a whole have held far steadier than they might have and in fact we’ve seen some rates increasing.

Why is this happening?

Quite simply this activity indicates a change to market sentiment about what will happen to the base rate going forward.

The SONIA (Sterling Overnight Index Average) swap rates – which are the rates at which banks lend to one another – are based on future interest rate expectations. And since the Budget, these have been going up.

As at 13th November this year, the 1-year SONIA swap was 4.422% up from 4.307% a month earlier, and the 5-year rate was 4.063%, up from 3.804%. This would indicate that it’s no longer a certainty that there will be another cut in December – and generally the consensus is that base rate will remain a little higher for longer after all.

As a result, we have already seen some positive movement in the fixed term bond and ISA rates, especially the longer-term accounts. Although the longer-term rates are still generally a little lower than shorter term, the gap has narrowed.

At the beginning of the year the top 1-year bond was paying 5.50% whereas the top 5-year bond was 0.75% less – at 4.75%. At the time of writing, although top rates have fallen a little, the 5-year bonds have held up better. The top 1-year bond today is paying 4.85%, whilst the top 5-year bond is paying 4.46% - a gap of just 0.39%.

What should savers do?

With interest rates expected to start to fall again, albeit slightly less than originally thought, while inflation is set to keep close to the 2% target, locking some of your cash up for longer could still be a wise thing to consider. But remember, that once opened there is no access to the money until maturity, so it’s vital to make sure you won’t need it.

Those who need immediate access can also feel relieved that the top rates on offer have fallen by less than the base rate cuts that have occurred this year. The first cut of 0.25% happened in August this year, followed by the latest 0.25% cut earlier this month. However whilst the top rate available at the beginning of the year was 5.22% AER, today you can still achieve 4.87% AER.

However, it’s important to keep an eye on the rates, as easy access accounts are variable, so if the rate you are earning becomes less competitive, ditch and switch. For example, the Metro Bank Instant Access Savings Limited Edition that was market leading at the beginning of the year paying 5.22% AER is paying 3.70% today – a drop of 1.52% - three times that of the base rate!

The financial landscape remains uncertain as market sentiment shifts in response to evolving base rate expectations and broader economic policies. While savers have benefited from a steadier-than-expected interest rate environment, the coming months will likely require continued vigilance.

For those looking to make the most of their savings, a balanced approach could be the key: consider locking in competitive fixed-term rates for part of your funds to secure returns over time, while keeping some savings in easily accessible accounts to maintain flexibility. Regularly review your savings accounts to ensure they remain competitive, as rates can change quickly in the current climate.

Looking ahead, as we approach the final MPC meeting of the year savers should remain adaptable, ready to act as the market evolves, ensuring their hard-earned money continues to work as effectively as possible.