Have savings rates already peaked?

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

There are currently TWO top easy-access savings accounts paying a decent 2.55% — a far cry from the 0.7% on offer back in November 2021.

However, while savings rates have increased over the past 12 months or so, there are signs things are starting to slow down. Rates on the top easy-access and one-year fixed accounts are both less generous than a month ago.

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?

The highest easy-access savings rate is now 2.55% AER variable. This is a huge difference compared to a year ago, when the highest rate was a pitiful 0.7%.

For fixed savings accounts, it's an even bigger contrast. Today, the top one-year fixed account pays 4.37% — 3.67% MORE than the equivalent fix a year ago.

While the bigger picture is that savings rates have risen massively in 2022, it's a fact that the rates on offer today aren't quite as juicy as a month ago.

In late October, it was possible for savers to earn 2.75% easy-access, or 4.5% in a one-year fix. That's not a huge difference, of course, but a change big enough to indicate that savings rates may have already peaked.

Why have savings rates risen this year?

The improved savings rates we've seen this year has been against a backdrop of soaring inflation. So while savings rates are technically higher than a year ago, the real terms value of cash is now decreasing at a much faster rate.

In October 2021, the Consumer Prices Index reported inflation was running at 4.2%. The most recent data for October 2022 suggests inflation has now reached 11.1% — a 41-year high.

Yet while inflation is bad for those holding cash, the consolation for savers is that high inflation also puts pressure on the Bank of England to raise interest rates. So far this year the UK's central bank has hiked its base rate (a.k.a interest rates) on seven occasions. The base rate now stands at 3%, compared to a 300-year low of 0.1% a year ago.

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 has already peaked. In addition, the Bank of England's own inflation forecast has predicted inflation will peak at 10.9% in the current quarter.

According to the Bank of England, UK inflation will now begin to decrease, mainly for three reasons.

1. The energy bills support on offer. The Government has taken the sting out of soaring energy costs by implementing an Energy Price Guarantee. The state is also paying households £400 through the Energy Bills Support scheme

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.

3. Less demand for domestic goods. It's expected consumer demand for UK goods will slow in the coming months which may also help to reduce inflation pressures.

If the Bank of England proves to be correct with its inflation predictions, there's every chance it will soon stop increasing its base rate. This will put the brakes on borrowing costs for banks which could lead 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, Tandem and Atom Bank both pay the joint-highest easy-access rate of 2.55% AER variable. There's no minimum sum needed to open either account, though both are app-only.

If you don't want to rely on an app, then Nationwide pays a slighly lower 2.5% AER variable — though this account limits account holders to three withdrawals a year. If you want to access your cash on more than three occasions then you'll see your rate drop to just 0.75%.

Keen to boost your interest rate with a fix? SmartSave pays the highest one-year fixed rate at 4.37% AER, though you must have at least £10,000 to open it. If you've less, then app-only Atom Bank pays 4.35% AER and you can open an account with just £50.

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 three-year fix is from Access Bank UK which pays 4.86% AER. If you want to lock away for even longer then Zopa pays 4.9% AER fixed for five years.

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.