Why savers are still waiting for chance to cash in as interest rates rise - Sarah Coles
It means savers feel like the parents of teenagers right now. This was supposed to be the good bit, so where are your rewards?
The Bank of England has hiked interest rates five times in the past six months. That’s the fastest it has raised rates over this kind of period for the past 30 years. It brings the Bank rate to 1.25 per cent – its highest in 13 years.
Advertisement
Hide AdAdvertisement
Hide AdFor the 13 years when the Bank rate was bumping along below one per cent, and for the two years when it was at 0.25 per cent or less, savers were resigned to the fact they were going to make next to nothing in a savings account.
But now, with rates finally rising, they were expecting some payback. Unfortunately, it’s not working out this way. The Bank of England is getting in the way, because it is torn between keeping a lid on inflation and avoiding inflicting any more damage on the economy. It means it’s keeping rates far lower than it would usually do with inflation at this level. We’re now facing the biggest gap between inflation and the Bank of England interest rate that we’ve seen for around 50 years.
The high street banking giants aren’t helping either, because they’re only passing on a tiny fragment of rate rises to their savers. According to Moneyfacts, the average easy access savings account in November 2021 paid 0.19 per cent and by May 2022 it had only risen to 0.39 per cent. That’s up a disappointing 0.2 percentage points. Meanwhile, high street banks were offering as little as 0.1 per cent, and one bank continues to offer just 0.01 per cent.
The problem is that the big banks don’t have any incentive to raise these rates substantially. During the pandemic, not only did we save at record rates, but we also joined a flight to familiarity, and put these savings into accounts with the high street banks. At the same time, we were loath to lock our savings away just in case life threw any more surprises at us, so we left the cash in easy access savings. As a result, the banking giants are awash with easy access savings. It means they don’t really want any more of them, so they can afford to keep these rates as low as they like.
Advertisement
Hide AdAdvertisement
Hide AdThat’s not to say rates haven’t risen at all. They’ve been creeping up among the more competitive banks since December, and a few players in the easy access market have been pushing special deals for people willing to move their current account, which has put upwards pressure on rates more generally. It means that if you want a better deal on your easy access savings, you need to move them. Right now you can make up to 1.56 per cent if you’re prepared to open a new current account, 1.4 per cent if you only want to make a couple of withdrawals a year, or 1.35 per cent with no strings attached.
Meanwhile, we’ve seen a lot more movement in the fixed rate market – especially among shorter-term fixed rates. At the time of writing, you can get 2.51 per cent if you fix for one year and three per cent if you fix for two. It means that once you have an emergency savings safety net of 3-6 months’ worth of essential expenses in an easy access account, you can consider tying some of your savings up for at least a short period.
It’s a difficult decision at the moment, because at a time of rising rates people will be worried that they will fix now, and then the competitive rates will rise around them, leaving their account looking less rewarding. There is certainly a high probability that rates will rise from here. The Bank of England now expects inflation to peak at an incredible 11 per cent, and the market is pricing in a series of rate rises, taking the Bank over three per cent in 2023.
However, if you decide to wait and see, you run into problems. You can’t be 100 per cent certain there will be more rate rises, and if there are any more major shocks to the UK economy there’s still the chance they will increase more slowly than expected. Even assuming rates continue on their upwards path, the process of this being passed on into savings rates isn’t straightforward. Rather than getting an overnight uplift on the day of a rate announcement, you tend to see them rise more gradually over the weeks and months both before and afterwards. You have to ask yourself when is actually going to be a good time to switch, because there might be something better tomorrow.
Advertisement
Hide AdAdvertisement
Hide AdOne option is to fix for a relatively short period, to take advantage of today’s rates, and then fix again for even more interest when that rate expires. Alternatively, you may want to switch to a competitive easy access account while you wait for fixed rates to rise.
And for money you don’t expect to need for at least five-10 years or more, you can consider whether investment ought to be part of the picture. There are no guarantees when it comes to investment, and your money will rise and fall in value – especially over the short term. However, typically over the long term it tends to perform better than cash and stand a much better chance of keeping up with inflation.
Young downsizing as they join ‘the crawl to small’
The race for space is being won by the better paid. Right now, we’re less likely to be considering upsizing than any time since the onset of the pandemic, and it’s only higher earners who are still trading up in significant numbers.
More than a quarter are planning to do so in the coming year – compared to one in 20 basic-rate taxpayers.
Advertisement
Hide AdAdvertisement
Hide AdThey’re also twice as likely to be considering moving areas, which owes much to the rise of hybrid working among this group, which leaves more of them considering a move further from work, where they’ll have even more room to roam.
Meanwhile, younger people are starting the ‘crawl to small’. Moving into a smaller property is usually seen as the preserve of retired people looking for extra cash, but this year the biggest downsizers will be those aged 18-34 – more than one in ten of whom plan to move into a smaller and cheaper property.
Part of this is because young people are almost twice as likely to move as other age groups. However, young people aren’t just downsizing more compared to other age groups, those aged 18-24 are also more likely to downsize than upsize.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown