Today, the Bank of England’s Monetary Policy Committee met for the first time this year to discuss the base rate.
In a widely expected decision, the committee voted to hold rates at 5.25%, which continues to be the highest rate we’ve seen for 16 years.
The base rate plays an important role in controlling inflation, and the Bank of England has a target of reducing inflation to 2%. Currently, inflation is double this at 4%, so it comes as no surprise that the committee is keen to keep rates high until this reduces further.
Plus, inflation increased marginally from 3.9% to 4.% in December 2023, which surely played a part in today’s decision. At the end of 2023, the Bank of England’s governor Andrew Bailey said there was still some way to go before its inflation target could be reached.
Experts are now predicting that the 2% target will not be achieved until next year, so the base rate could remain high for a further few months.
Despite the base rate remaining at 5.25%, the outlook on mortgages has been positive with rates on two and five-year fixed mortgages declining. This is good news for homeowners, but savers have suffered as rates have fallen on fixed-rate accounts.
At the time of the Bank of England’s last decision in December, the top interest rate for a one-year fixed-rate account was 5.70%, whereas this week the top rate for a similar account is 5.16%.
The monthly average for all savings accounts also stood at 4.3% in December, whereas now it’s 4.1%. This clearly illustrates that although the base rate has remained the same, providers are reducing their rates, so we could see a similar pattern in February.
An illustration of how savings rates have changed in relation to the Bank of England base rate over the two past years. The average rates have been calculated by taking the rates from the whole of market at the time of the base rate change. Source: Defaqto and Bank of England data.
Fortunately, it’s still worth savers moving their money if it’s currently sitting in an account earning little to no interest, as there are many accounts offering rates above inflation.
If the interest rate is above inflation then it gives your money more purchasing power - a key motivation for savers.
Plus, despite the falling rates on fixed-rate accounts, it’s still a good time to lock away your money, as you never know how long the top rates will last…
Looking at the market today, the top easy access account is currently from Coventry Building Society and its triple access saver. This has an interest rate of 5.15% and three withdrawals are allowed each year without charge.
However, for those looking for more flexibility, Cynergy Bank has an easy access account at 5.10% - which includes a bonus rate of 1.15% for the first 12 months. Both of these accounts can be opened with just £1.
In terms of fixed-rate accounts, the interest rates are similar to easy access but you’ll be guaranteed the rate for a set period of time. Investec has a one-year fixed rate saver at 5.15% and it can be opened with a deposit of £5,000. For longer term saving, The Access Bank UK has a three-year fixed-rate account at 4.60% and this can also be opened with a £5,000 deposit.
For anyone keen to maximise their ISA allowance before the end of the tax year - ISAs still have interest rates above inflation.
Moneybox has a market-leading easy access cash ISA at 5.09%, but bear in mind the rate drops to 4.15% after the first 12 months and there is a limit of three withdrawals a year. In terms of fixed-rate cash ISAs, Shawbrook has a 1-year fixed-rate cash ISA at 4.98% and you need a minimum opening deposit of £1,000.
And don’t forget to look into notice savings accounts.
This type of savings account is a good compromise between fixed and easy access, and at the moment has some great rates for savers. For example, Vanquis has a 90-day notice account with an interest rate of 5.50%. This not only comfortably beats inflation - but the frozen base rate too!
As a trained journalist, Lucinda has spent the past 10 years writing and editing content for regional and national titles, including The Mirror, WalesOnline and Manchester Evening News. She is now a personal finance editor and specialises in savings, helping people to make confident financial decisions so they can save for what matters most.