Have savings rates peaked?

Savings rates have risen a lot with 'market-leading' deals a long way away from the sub-1% rates we were seeing a few years ago.

As of July 2024 there were FOUR top easy-access savings accounts paying more than 5%—a far cry from the 0.7% on offer back in November 2021.

However, while savings rates have increased a lot, there are signs things may start to slow down. Not only has the base rate stabilised, but inflation is down significantly.

One sign that these factors are impacting savings rates is that we are now seeing that rates on the top one-year fixed accounts are less than the top notice savings accounts rates, which are variable. This points to an expectation in the market that rates will come down within the year.

So, have savings rates already peaked? Or can we expect better accounts to become available? Let's take a look.

How have savings rates moved over the past 12 months?

Average savings rates have risen in the past year—this holds for easy access, notice and fixed accounts. Average rates on all three account types are still below the base rate (currently 5.25%), but the highest rates are typically found on fixed deposits. In May 2024, the average monthly weighted average interest rate of UK resident monetary financial institutions' (excl. Central Bank) sterling time deposits with fixed original maturity from households, not seasonally adjusted, was 4.58%. Compare this to notice and instant access rates at 2.78%:

Let's consider a specific example, of easy-access (aka 'instant access') savings. In July 2024, the highest easy-access savings rate is now 5.2% AER variable, from Ulster Bank. This is a big increase compared to a year ago, when the highest rate was 4.35% (from Shawbrook).

That said, we've noticed something peculiar with fixed savings rates. As you can see in the chart above, fixed savings rates have increased in the past year on average. BUT the best fixed rates are lower now than they were a year ago. For example, one year ago the top one-year fixed rate was 6.1% (FirstSave); now it's 5.25% (My Community Bank and GB Bank at Raisin). Perhaps it's just market forces at play and a year ago certain banks were keen to attract deposits—keen enough to offer rates well above the average. And this year, the market has settled.

Why have savings rates risen this year?

The improved savings rates we've seen this year reflect a backdrop of soaring inflation over the past few years. In fact, there is typically a delay between inflation in the real world and the impact on savings rates. So while inflation rates peaked back in October 2022 (9.6%), savings rates seem to have peaked in the summer of 2024, nearly two years later:

In October 2022, the Consumer Prices Index reported inflation was running at 9.6%. The most recent data for May 2024 suggests inflation has now dropped to 2.8%.

Yet while inflation is bad for those holding cash, the consolation for savers is that high inflation also put pressure on the Bank of England to raise interest rates. The UK's central bank has hiked its base rate (a.k.a interest rates) on more than a dozen occasions since the peak in inflation. The base rate now stands at 5.25%, compared to a 300-year low of 0.1% back in 2021.

While not directly linked to savings rates, the Bank of England's base rate has a massive impact on the savings market. That's because the base rate is the rate at which banks can lend to each other. So when interest rates rise this can hot up the competition for saver's cash.

Have savings rates already peaked?

It's impossible to say for certain whether current savings rates will improve in the near future. What we do know, however, is that the Office for Budget Responsibility has suggested inflation will continue to fall. In their latest May 2024 CPI inflation update, they said: 'Inflation has been falling recently and we expect it to continue falling and at a faster pace than in our November 2023 forecast over 2024 and 2025. In addition, the Bank of England reiterated in May 2024 that their target is 2% inflation (lower than the latest 2.8% figure).

According to the Bank of England, UK inflation has decreased recently mainly for two main reasons:

1. Lower energy prices. While energy price in the first half of the year have decreased, contributing to lower inflation figures; however, energy prices are expected to uptick in Q3 and Q4, putting some upwards pressure on inflation rates again.

2. Lower costs for imported goods. The Bank of England says some of the production difficulties businesses have faced following the pandemic have now started to ease. Supply chain pressures have generally eased driven by softer global demand and a normalisation from the past supply chain problems resolving.

The Bank of England last increased the base rate in August 2023, putting the brakes on borrowing costs for banks which in theory leads to a drop—or a slowdown — in the number of generous savings deals on offer.

What should savers do?

While savings rates may no longer be climbing like there's no tomorrow, if you've cash in an account paying you a pitiful rate, it's still worth taking action.

While easy-access rates are variable so can change at any time, fixed accounts pay a set rate for the duration of the term. This means that if you're fearful savings rates will fall in the near future, you can lock in a guaranteed rate today.

Just be mindful that with fixed savings accounts you won't have access to your cash for the entire duration of the fixed period. If that's not for you, then an easy-access account is probably more suitable.

Right now, Ulster Bank and Chase Bank pay the highest easy-access rates of 5.2% and 5.1% AER variable.

Monument pays a slightly lower 5.03% AER variable — you'll need to download an app to open this account but there are unlimited deposits and withdrawals.

Longer fixes pay higher rates, but if you lock away your cash for a long time there's a risk you'll miss out if rates rise in future.

The top one-year fix is from My Community Bank or GB Bank at Raisin, both of which pay 5.25% AER. And Oxbury Bank offers the same rate for six months.

There's lots of movement in the savings market right now. To explore more options, and to see the latest accounts available, take a look at our best savings accounts guide.

All accounts above have FSCS savings safety protection.