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Interest Rate Rise a “Hollow Victory For Cash Savers”

While Thursday's interest rate rise is positive for cash savers, it's likely to take time to filter through to cash savers. Here are the best buys in the market today

David Brenchley 2 November, 2017 | 12:07PM

The Bank of England announced its first interest rate rise in more than 10 years on Thursday, increasing the base rate by 25 basis points to 0.5%.

While it’s not ground-breaking news – only reversing the post-Brexit 0.25% cut – it has been described as a “symbolically important” milestone by commentators. It’s the first time many Britons – 8 million, according to platform Hargreaves Lansdown – have seen a rate rise in their adult lives.

“For a whole generation of UK households now entering adulthood, it’s a small but important reminder that interest rates can move in an upward direction, even if only slowly,” says Lucy O’Carroll, chief economist at Aberdeen Standard Investments.

It is likely to be a “hollow victory for cash savers”, though, says Laith Khalaf, senior analyst at Hargreaves, “because it still won’t deliver a level of interest that keeps up with price rises”.

Tighter monetary policy, he adds, will take its time to filter through to cash savers because banks will delay passing through higher rates to depositors for as long as possible.

Average Savings Rates Continue to Fall

Anna Bowes, director at advice website Savings Champion, points out that while the best-buy easy-access rate has increased 30% year-to-date the average rate has fallen, despite base rate staying steady for over a year.

Additional data from Moneyfacts.co.uk shows that the average cash ISA rate has gone from 5.49% in October 2007 to 1.02% today – a decline of 80%. The average easy-access account has fared worse and, at 0.4% today, is now 90% lower than a decade ago.

On the other hand, the top rate for easy access accounts has improved by 30% year-to-date and for three-year fixed rate bonds by almost 40%. A three-year fixed rate ISA, meanwhile, has increased by 75%, although the best easy-access ISA rate is up just 7%.

Moneyfacts’ Charlotte Nelson says: “With the base rate likely to rise savers should use this as an opportunity to get the maximum possible return, looking towards the best buys to see if better rates can be had elsewhere.”

Best Rates Still Lag Inflation

However, savers are still unable to find products to beat the most recent inflation print, which stands at 3%, data compiled by both Moneyfacts and Savings Champion shows.

Those looking for the best rate, as at 1 November, will have to tie their cash up for five years. Bank of London and the Middle East’ (BLME) and Ikano Bank pay 2.5% and 2.46% respectively for five-year fixed rate bonds. On five-year cash ISAs, Virgin Money leads the way, paying 2.4%.

If you wish to lock your cash up for a shorter period Vanquis Bank’s Three-Year Fixed Rate Bond pays 2.25%. Coventry Building Society’s Poppy Fixed ISA, which matures on 30 November 2020, pays 2%.

If you’re only willing to part from your cash for 12 months, BLME has a One-Year Premier Deposit Account that pays 2%. Virgin Money’s One-Year Fixed Rate Cash ISA pays 1.51%.

For easy access to your money, both BM Savings and RCI Bank give a rate of 1.3% for their savings accounts, while Post Office, at 1.07%, leads Sainsbury’s Bank, at 1.06%, on easy-access cash Isas.

Notice accounts, where you must inform your provider when you wish to make a withdrawal, pay slightly better at 1.52% for Milestone Savings 95 Day Notice Account and 1.5% for Al Rayan Bank’s 90 Day Notice Account.

You can find better rates on high interest paying current accounts, though, and Bowes says “it’s time for savers to vote with their feet” and use all the tools in their armoury to earn as much interest as they can.

Nationwide offers 5% AER on balances of up to £2,500, although this includes a bonus of 4% for the first 12 months for which you must deposit a minimum of £1,000 per month to qualify.

Tesco Bank and TSB Bank both pay 3% AER on balances of up to £3,000 and £1,500 respectively. Again, though, you make minimum monthly deposits as well as meeting other terms and conditions such as setting up direct debits and registering for online banking.

While Khalaf still urges savers to keep a cash buffer as a rainy-day fund – around three to six months expenditure as a minimum – he adds that for the longer term they should consider investing in more productive assets.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk