While the last couple of weeks have been pretty quiet in the savings market (well there have been lots of Bank Holidays after all), 2022 as a whole has been the busiest that I have known.
Including December 2021 when the base rate was first increased, there have been nine Monetary Policy Committee (MPC) meetings and nine base rate hikes, with the Bank of England base rate increasing from 0.10% to its current 14 year high of 3.50%. The last time the base rate was as high as this was October 2008.
Of course, while an increase in the base rate means that the cost of borrowing rises, it means that savings rate go up too – which is good news for savers, especially those that have no debt!!
That said, while it does mean many savings rates have been increasing, it’s by no means been an even race. Some providers have been more generous than others. But one thing’s for sure, many of the savings rates that can be achieved these days are the highest they’ve been in over a decade.
How have rates improved over the last 12 months?
Just over a year ago, when the base rate was still at 0.10%, the best easy access account on the market was paying around 0.71% AER – today Zopa is offering 2.86% AER. That’s an increase of more than four times. And in terms of what that means for the pounds in your pocket, if you have £50,000 in an account paying 0.71%, that would produce interest of £355 a year. If you are instead earning 2.86%, your £50,000 would earn £1,430 per annum.
If we look at fixed term bonds, the returns you can expect today compared to a year ago are equally impressive. If you have a 1-year bond maturing now, and you are looking to roll it over, the return you will earn this year could be as much as 4.33% (12 months Sharia account from Habib Bank AG Zurich), as opposed to 1.41% last year. So rather than £705 gross, you can instead look forward to receiving £2,165 in a year’s time!
But there are also the baddies. While Zopa is paying 2.86%, Virgin Money is offering just 0.25% on its Everyday Saver easy access account. So, it’s important to make sure you are not languishing in one of these poor paying accounts.
Of course, what has happened over the last 12 months is important, but what is likely to happen next is probably more interesting.
What’s likely to happen in 2023?
The Bank of England has been raising interest rates in order to try to bring inflation under control. Higher interest rates should slow UK price rises, which in turn should mean that the high level of inflation that we are currently experiencing does not continue. The Bank has stated a couple of reasons that it expects inflation to fall from the middle of 2023.
It says “First, the price of energy won’t continue to rise so quickly. The Government has introduced a scheme that caps energy bills for households and businesses for six months.
Second, we don’t expect the price of imported goods to rise so fast. That’s because some of the production difficulties businesses have faced, are starting to ease.
Third, we expect there to be less demand for goods and services in the UK. That should mean the prices of many things will not rise as quickly as they have done.”
If the Bank’s optimism is to be believed and inflation does start to fall, the Bank will no longer need to raise interest rates further – but we believe there are still a couple more in the pipeline. In the latest Monetary Policy Report which was published on 3rd November, the Bank of England was forecasting the base rate to peak at around 5.25% by the 3rd quarter of this year, before falling back slightly. However, we have subsequently had an Autumn Statement which appears to have calmed the markets somewhat.
That said, short dated gilt yields (so 2-year, 5-year and 10-year) have been increasing again recently, which, as we’ve mentioned before, indicates that the markets are anticipating higher interest rate rises than previously expected. So, I asked The Private Office’s (TPO) Investment Team what their prediction for interest rates is.
Daniel Douglas-Wright who is Head of Investments at TPO says “We believe that base rate is going to increase to 4% at the next MPC meeting, but after that you start seeing a disconnect between what the Bank of England is saying and what the market is expecting. I can't see rates in the UK going materially above 4.25% - 4.50% at the upper end, which really will tell you we're going to see one rate hike coming up - and then maybe one or two more maximum.”
Daniel goes onto say that “But, there's a general view that rates are going to stay higher in the UK – so once they stop rising, that doesn’t necessarily mean they will fall again – certainly no-where near as low as they have been for the last decade.”
What does this mean for the interest rates on our cash savings accounts?
You may remember that back in September last year, several announcements in the so-called ‘mini-budget’ saw fixed term bond rates soaring as markets predicted that the base rate would need to rise to as high as 6% and the Bank of England had to intervene to calm the markets.
Since then, as mentioned above, market expectations have fallen a little and as a result we have recently seen the best fixed term bond rates fall slightly, but perhaps not as much as expected. Therefore, there is a general feeling that even though there could be a couple more base rate hikes to come, these are already being priced into the fixed term bond rates and therefore we’re unlikely to see rates rising a great deal more, if at all.
Variable rates on the other hand, tend to be more reactive to the base rate as it happens, so hopefully rates on easy access and notice accounts will see a further push upwards. As our Rates Rundown illustrates this week, the notice account market has been really interesting recently and you can earn more than 3% on a 90 days’ notice account.
Of course any predictions one makes are based on the information that is currently available – so there could always be more shocks around the corner.
But, the main thing to remember is that not all providers behave in the same way and therefore it’s important not to simply assume your bank or building society is treating you fairly – so check the rates you are earning and shop around to see if you can put more precious pounds in your pocket.
@savingschampion
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