Yahoo Finance What next for savings rates?
If you haven’t switched away from a branch-based savings account with a high street giant by now, it really is time to consider it.
They’ve been seriously dragging their feet over passing rising rates onto savers, and although they’ve upped them a little under pressure from the government, there are still big banks paying less than 1% on easy access savings, while their smaller and newer competitors pay as much as 4.35%.
Of course, at a time of rising rates, some people will be tempted to wait before moving, in the hope that rates keep rising, so it’s worth exploring what’s actually likely to happen to savings rates in the coming months.
There’s a reasonable chance that easy access savings rates will rise from here, because inflation has been so sticky that the Bank of England is expected to keep hiking rates.
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Switching at the peak is nigh-on impossible though, because the jury is out over exactly how high the Bank will go, and depending on who you ask, you’ll get estimates anywhere between 5.75% and 7%.
To make life even harder, in an environment of rising rates, we don’t get a big bang when a rate rise is announced. Instead, we tend to see accounts gradually inch ahead of one another over a period of weeks and months.
Nobody wants to move too far ahead and pay too much to fill their coffers, so they gradually creep upwards. It means that whatever time you pick to switch, there’s a chance the best deal will be higher tomorrow.
It risks leaving people paralysed with indecision, and in the meantime their cash may be languishing in an account paying next to nothing. As a result, it makes sense to move sooner rather than later.
There’s nothing to stop you switching again later if rates rise further, but at least in the interim you’ll be getting a decent rate.
Fixed rates – should I fix my savings or not?
You don’t necessarily need to opt for easy access for all your cash either. It’s the right place for your emergency savings, but for anyone who is of working age, once you have more than three to six months’ worth of essential expenses to hand, you can consider tying up the cash for the period that’s right for you in return for more interest. At the moment, you can make over 6% by opting for a one-year fixed rate account.
Of course, for anyone considering a fix, the thorny question arises over whether now is the time to make a move, or whether you should hold back in case fixed rates rise further.
However, it’s worth knowing that this market is fundamentally different from the easy access one. We do tend to get a small bump with each rate rise, but generally fixed rates owe more to rate expectations than they do to actual BoE rate decisions – and there’s every chance these will fall from here rather than rise.
Right now, a rise to 6.5%. and then a pause at this level, has been priced into the market. It’s why short-term fixes are so generous at the moment.
Further down the line, the market is expecting that higher rates will have done their job and weakened the economy, so they need to be cut again. It’s why rates over four or five years are slightly lower.
If these expectations play out, then we’re likely to see higher fixed rates hold until the point when lower rate forecasts further down the line start to feed into savings deals. If we get signs of even more inflation than expected, it could bump these expectations up again so fixed rates savings could rise.
On the flip side, if we get signs that inflation is starting to ease, it could mean the Bank of England may not end up raising rates as far as the market currently expects, and the drop in rate expectations could depress savings rates.
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The balance of probability right now is that the market may well have over-egged its expectations. It means you risk leaving your money in an account paying a pittance in the hope that something better is around the corner, only to find that fixed rates start falling before you’ve got round to fixing.
In reality, nobody really knows which of these scenarios will play out, how high the Bank will hike rates, or when they’ll peak. There are just too many variables for absolute certainty.
It’s why instead of basing your decisions on second-guessing the world economy, it makes sense to consider your own circumstances right now, make a decision whether you’re happy with rates today, and take advantage of some really good deals while they last.
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