Base Rate still on hold: but for how long?

31st January 2014

Another month and another base rate decision – to keep interest rates at 0.50%!

No real surprise, however, with the number of unemployed falling more rapidly than previously expected, could the Bank of England raise interest rates sooner rather than later?

Since Mark Carney took over at the helm of the Bank of England Treasury Select Committee, he’s made it clear that interest rates won’t rise until statistics show an overall return to stability looking at a variety of measures; one of the main ones being unemployment.  As unemployment figures have fallen and with further indications that it will continue to fall faster than originally expected, many are now anticipating the possibility of an interest rate rise in the coming months rather than years.

One key indicator is what providers believe will happen to interest rates and looking at fixed rate bond pricing is a good starting point. Over the last few months, increases to fixed rate bonds have been indicating that interest rates are indeed expected to rise – but not within the next 12 months. The fixed rate bond battle has continued, albeit with less gusto - but not on terms of less than two years, which could suggest that providers aren’t expecting a real edge upwards any time soon.  That said, even though inflation has fallen, the pressure is mounting on Mark Carney to act and moving the goal posts is only going to confuse and annoy savers.

Here’s an update on how the battle of the fixed rate bonds is playing out;

The battle in the fixed rate bond market kicked off towards the end of August, when the best five year fixed rate bonds reached 3% – four months later, this has now increased to the current best rate of 3.25% on a five year fixed rate bond, with FirstSave.

FirstSave also joined the Skipton Building Society in offering a seven year fixed rate bond, both paying 3.50%. And then Secure Trust pipped them with its seven year term account, paying 3.52%. However the bond from FirstSave is now the only one still available.

The battle widened in October to incorporate three year fixed rate accounts, with SAGA kicking things off with its competitive 2.55% rate. Aldermore joined in but swiftly withdrew its 2.60% bond whilst Shawbrook, Close Brothers and Secure Trust Bank joined in the fray - pushing rates to over 2.70%. However things have recently waned somewhat and whilst ICICI Bank has launched a three year bond paying 2.70%, the rest of the field is now back under 2.60%

In November the battle moved into the shorter term market, albeit between a smaller number of providers.  Aldermore (2.33%) and Shawbrook (2.30%) both released their two year options on the same day. But FirstSave pipped them with 2.35%, so Shawbrook retaliated with a leading rate of 2.40% - although this has now been withdrawn. However once again ICICI Bank has jumped to the top of the table with its current offering of 2.40% and KRBS has launched its improved two year bond at 2.30%.

However, there have been few increases in the one year fixed rate bond category but nothing spectacular and often short lived. In fact the current best rate of 2% gross/AER (Punjab National Bank) is actually slightly lower than the best rates that were available earlier in the year.

Rates on fixed rate ISAs have also been edging up, but the battle has mainly been in the fixed rate bond market. We’ll keep a close eye on any further developments.

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