Savings rates are rising and this is the reason why

After years of dire returns, interest rates on savings accounts are nudging upwards. So, why are savings rates on the rise? And will rates continue to increase? NimbleFins takes a look.

Interest rates on savings accounts have sat in the doldrums for well over a decade. During the past two years alone, market-leading easy-access deals have paid barely above 1%. However, there are signs that the tide may finally be starting to turn for savers. Rates are heading upwards and we’re (finally) starting to see some real competition in the market.

So, why are savings rates rising right now? Let’s explore.

Savings rates: a quick history lesson

Did you know that, back in 1990, the average interest rate on a savings account was 13.5%? Today, this rate seems extraordinary. Take last year for instance, when the average savings account paid a misery 0.35% in interest.

While it’s worth pointing out inflation stood at a lofty 8% during the early 90s, that figure isn’t far from the UK inflation rate right now. According to the Office for National Statistics, UK inflation is currently running at 6.2% (and many expect it to go higher later this year).

In terms of savings rates in the past, it’s worth knowing that average interest rates started to fall during the tail end of 90s. That said, during the 2000s, right up to 2008, average savings rates stood comfortably above 4%. 2008 was of course the year of the financial crash. Between 2008 and 2014, average interest rates on savings accounts fell from 5.09% to 1.5%.

Why have savings rates fallen so much since 2008?

There are a few reasons why savings rates have fallen so much over the past 14 years. Let's take a look at them.

Reason 1: Massive cuts to the base rate

One big reason why savings rates have been pitiful since 2008 is due to the actions of the Bank of England (BoE). The UK's central bank is in charge of monetary policy and controls the 'base rate'. The base rate refers to the rate at which banks can lend to one another and it can have a massive impact on savings rates.

A low base rate means banks can access money cheaply. In such an environment, banks have little need to attract cash deposits from retail savers. As a result, a low base rate typically correlates with low savings rates.

During 2008 alone, the BoE slashed its base rate from 5.25% to 2%. By March 2009 it reduced it further, to just 0.5%. Because the base rate has remained extremely low since 2008, savings rates have generally mirrored this.

Reason 2: Quantitative easing (aka 'printing money)

Aside from maintaining a low base rate, it’s also worth knowing that the BoE undertook an extensive ‘quantitative easing’ programme back in 2008, starting with a £75bn bond buying programme.

Quantitative easing is a fancy term for ‘printing money’ and is likely to have had a big impact on savings rates at the time. That’s because the process massively increases the amount of money in circulation. This extra capital usually ends up in the stock market and other fixed assets, and can have a detrimental impact on the value of money — including savings.

Reason 3: Funding for Lending

In addition to Bank of England policies, in 2012 – four years after the financial crash - the UK Government introduced ‘Funding for Lending.’ This was a scheme that gave banks and building societies the opportunity to borrow at below-market rates.

While Funding for Lending has since ended, it was almost certainly another factor that contributed to low savings rates during the 2010s. After all, why would financial institutions offer juicy rates to savers when they could borrow capital at discount rates?

Why are savings rates rising right now?

Whatever your thoughts on the actions of the UK Government and the Bank of England over the past decade, the fact is, savings rates have been dire for a long time. However, there are signs things may be starting to change. Here are three reasons why:

1. Borrowing costs are rising.

The Bank of England has already upped its base rate on three occasions so far in 2022 - from 0.5% to 1% - in order to ward off rising inflation. This has already influenced savings rates.

At the beginning of January, the top easy-access rate stood at 0.71%, while the top one-year fixed account was 1.36% AER variable. Today, the top easy-access deal has more than doubled – to 1.5% AER variable. Meanwhile, the top one-year fix now stands at 2.26% AER.

2. The Bank of England has stopped printing money.

In addition to upping its base rate, the BoE also recently announced it is to cut back on its quantitative easing programme.

This will reduce the amount of cash in circulation which is likely to hot up the competition for saver’s cash.

3. Inflation is showing no signs of slowing down.

While the Bank of England has already made moves to increase its base rate, the UK inflation rate is seemingly still on the rise. Latest inflation estimates from the UK central bank suggests inflation could exceed 10% this year.

Continued rising inflation means there’s a high chance of the Bank of England will raise its base rate again this year, perhaps on more than one occasion. This will further increase the cost of borrowing which is likely to have a positive impact on savings rates.

Do you have savings? If you’ve savings, take a look at our best savings accounts guide to find the right home for your cash.

Savings accounts FAQ

1. What impact does a rise in interest rates have on savings rates?

When interest rates rise (which refers to the 'base rate') savings rates should go up. This is because a higher base rate raises the cost of borrowing which should increase competition for saver's cash.

2. When will savings interest rates rise?

While savings rates will generally rise when the base rate increases, it's unlikely that all savings accounts will benefit. Some banks may simply choose not to pass on any increase to savers. This is why it's very important to keep a close eye on your cash, and be prepared to move your savings if your account is no longer a top pick.

Karl Talbot

Karl is a personal finance expert who specialises in writing about savings accounts, credit cards and cheap personal loans. Karl has worked for a number of personal finance publications including The Motley Fool and MoneySavingExpert.