By David Prosser
Is it time for savers, charities, small businesses and other organisations to lock into higher savings rates? While reading the announcements from the Bank of England’s (BoE) Monetary Policy Committee is more art than science, the shift towards lower interest rates does now appear to be gathering momentum. Are today’s savings rates as good as they’re going to get for the foreseeable future?
For now, the BoE base rate remains at 5.25%, where it has been since the 3rd of August 2023. However, the minutes of March’s MPC meeting show that for the first time since 2021, not a single member of the committee voted to raise the rate; one member voted for an immediate cut. Bank Governor Andrew Bailey also sounded convinced that base rate reductions will come sooner rather than later in interviews conducted after the meeting.
Why interest rates may fall
The change of tone from the BoE reflects the evolving economic landscape. The BoE’s priority is to get inflation back to the 2% rate it targets; official statistics show that it dropped to 3.4% in February, a bigger fall than expected, and way off the 11.1% peak seen in October 2022. Equally, the BoE’s senior figures are aware that the UK fell into recession last year – with the economy shrinking in both the third and fourth quarters of 2023. The MPC is keen to support a return to stronger growth.
“We’re getting closer to the first UK interest rate cut,” says think tank Oxford Economics, which expects reductions to begin in the second quarter. “We continue to forecast two further 0.25% rate cuts, lowering the bank rate to 4.5% at the end of this year.”
There can be no certainties, but that prediction is in line with pricing in the financial markets. The current consensus about the direction of travel in the coming months is that lower rates are now imminent.
That said, there are reasons to be cautious. While the drivers for interest rate reductions are beginning to stack up, there are counter-arguments too. For example, recent figures from Incomes Data Research showed that salaries offered by employers have been above inflation so far this year, which could accelerate price rises once again in the coming months; a 9.8% increase in the national living wage, scheduled for April, may also contribute to inflation increasing once again.
Another potential concern is that the Chancellor is moving towards a less restrictive fiscal policy, with tax cuts such as the national insurance contribution reductions announced in the recent Budget. The MPC may feel that moving too quickly on interest rates at the same time as tax cuts take effect would risk undoing some of the good work that has been completed to reduce inflation.
For some economists, such considerations mean the jury is very much still out on when interest rates will start to come down. The return of the UK to economic growth in January – albeit at a modest rate – may reassure the MPC that an early intervention to support recovery is not required, even if reducing mortgage borrowers’ repayments would help relieve the cost-of-living crisis and further boost growth prospects.
“The BoE probably requires more convincing to actually start the ball rolling,” Allan Monks, UK economist at investment bank JPMorgan told the Financial Times. “It is aiming to avoid having to potentially retrace its steps after beginning to ease and may struggle to contain expectations after it has started.”
Other analysts are convinced monetary policy will shift quickly. “I wouldn’t rule out May, when the Bank’s next Monetary Policy Report is published,” says Julian Jessop, an independent economist and a fellow of the Institute of Economic Affairs. “If this report forecasts that inflation will not only fall below the 2% target in April but then remain there or thereabouts for the rest of the year, it is hard to see how the MPC could justify waiting any longer.”
Tough choices for savers
All of which means that anyone – both individuals and organisations – with money in cash savings have some thinking to do.
The good news right now is that far more savings accounts are delivering positive real rates of return. Falling inflation means that banks and building societies are now routinely offering interest rates that add value to savings even with inflation taken into account.
Nevertheless, some savings providers have begun to reduce their rates and remove certain products in anticipation of lower base rates to come. The question for savers is therefore whether to try to lock into what is still available before rates fall any further.
That’s a less straightforward question than it might appear. Moving money into a fixed-rate savings account will protect you if the base rate does fall and providers cut rates on variable accounts accordingly. However, interest rates have already started to shift in line with that possibility; the best 3 and 5 year fixed rates available today are mostly lower than the best variable rates.
In other words, savers, charities, businesses and other organisations that seek to protect themselves from future interest rate reductions with a fixed-rate product, will likely have to accept a lower income in the short term than they could get from a variable rate. Instead, taking a slightly lower fixed rate in the hope of receiving more income in a few months’ time and for the remainder of the fixed term could be a smart move, especially if and when the base rate falls.
These are fine judgements. United Trust Bank’s Notice Charity account, for example, currently offers an annual interest rate of 5.00%, though you must give 200 days’ notice for withdrawals. The highest paying fixed-rate account also pays 5.00%, fixed for a year; charities fixing for two years will get 4.85%.
On three-year bonds, the rate available comes down to 4.15%. How long will it take for the base rate to fall sufficiently to make that look attractive compared to a variable rate deal?
In the end, anyone with savings to manage – both individuals and organisations – will have to make their own decisions about the best course of action. And you don’t have to put all your eggs in one basket.
For example, one option is to move some money into a fixed-rate deal – perhaps money you know will not be needed for the longer term – while keeping some funds, perhaps money you want to keep on hand for emergencies, in a variable-rate deal too.
One thing is clear, however. Many organisations hold money in savings accounts opened when interest rates were at rock-bottom lows and are potentially missing out on really meaningful amounts of interest.
David Prosser is a freelance journalist and personal finance expert.
This article isn’t personal advice. If you are not sure how to manage your savings, please seek advice from a professional Independent Financial Adviser.
Rates correct at the time of publishing. A minimum deposit of £5,000 is required to open an account and interest is paid at maturity.