Savers are being urged to “act now” ahead of the Bank of England’s Base Rate meeting next week or “risk” losing money.
The Base Rate has remained frozen at 5.25 percent since August 2023, which has held savings interest rates – and mortgage rates – high, in an effort to bring down the country’s soaring inflation.
With inflation now edging closer to the Government-set target of 2.3 percent, analysts suspect we could also be edging closer to a decision to reduce the Base Rate. But with the snap General Election set to take place a few weeks after, uncertainty prevails, once again, for what way the Monetary Policy Committee votes will swing.
Lucinda O’Brien, savings expert at money.co.uk says that, while it’s a “confusing time” for savers, she does “know one thing” about interest rates.
Ms O’Brien said: “It does feel like the committee is inching closer to a decision to drop the rates. Inflation has slowed to 2.3 percent, which is tantalising close to its target of two percent. Thankfully, the peak of 11.1 percent in October 2022 seems like a distant memory.
“And now we are seeing global markets dropping their rates. For example, The European Central Bank reduced interest rates last week – for the first time in five years. This is positive progress, but there are still some areas of concern for the Bank of England.
“Wage and services inflation still remain high as it only slowed slightly to 5.9 percent and unemployment in the UK is at the highest rate since September 2021. It’s been widely documented the committee will only drop rates when they are confident inflation is staying low.”
However, Ms O’Brien noted: “More data is being released next week, and if it contains positive inflation news could this be enough to sway votes? There is also the matter of a general election next month, so will the Bank of England opt for a drop now or rather wait until the political landscape has been decided?
“The predictions for this vote seem to change every day, so it is understandably a confusing time for savers. But there is one thing we do know – it’s highly unlikely the Bank of England will raise interest rates, so it’ll either remain at 5.25 percent or it could drop to five percent.”
Ms O’Brien urged this factor to be what savers “should focus on”.
She explained: “If the Base Rate sticks at 5.25 percent, interest rates on savings accounts could look familiar, with another month of top rates at around five percent.
“If the vote swings the other way, then the Base Rate could drop to five percent. This is the risk for savers as the current rates could then drop below five percent, as providers are keeping a close eye on the Base Rate.
“This is why it’s important to act now if your money is sitting in a savings account with low interest. If savers wait to see what transpires at the next Bank of England meeting, then it could be too late to take advantage of these high rates.”
To guarantee the interest rate, Ms O’Brien suggested onsidering opening a fixed-rate savings account. This type of account varies from one year to five years, depending on how long the person is comfortable locking away their money.
Ms O Brien said: “Currently, the top interest rate for a one-year fixed-rate account is 5.2 percent from The Access Bank UK. This can be opened with a minimum deposit of £5,000 and the interest is paid when the term ends next year.”
She explained that, if a saver opened this account and deposited the minimum amount, they would earn £260 before tax. However, Ms O’Brien noted: “If a saver waited for the Bank of England announcement and the Base Rate was reduced, then the interest rate could drop below five percent.”
For example, if the same account dropped to 4.5 percent, then the annual earnings would only be £225, which is £35 less.
Ms O’Brien added: “This is only the beginning, as the loss is greater the more money deposited.
“If someone deposited £20,000 today at 5.2 percent they would earn £1,040 after one year before tax. But if the interest rate dropped to 4.5 percent, they would only earn £900 – a loss of £140. So, it could really cost savers if they wait to move their money.”
