Will low savings account rates ever bounce back?
For years after the 2008 financial crisis we were all told that savings rates had dropped because the Bank of England base rate had dropped. Gone were the days of 4-5 per cent, while 0.25 became the new normal for easy access accounts.
When the base rate was raised last year for the first time in a decade, savers were perhaps optimistic of a rise in rates, however, competition between providers and their appetite for deposits are the key drivers of rate rises and until now, that has not been forthcoming.
So what might cause a boost in savings rates?
New entrants changing the game
At 20 July, there were 26 different savings accounts offering interest rates above the current consumer prices inflation rate of 2.4 per cent. With inflation holding steady and savings rates gradually rising, the number of savings accounts beating inflation has been trending upwards.
This represents a significant change. From July 2017 to March this year, no savings account offered a positive real interest rate. These accounts tend to come with longer term savings options, so if you’re happy to look at names you might not be familiar with and keep your money tied up for longer, there are options out there. On 20 July, the highest interest rate available on the market was Secure Trust’s seven-year fixed rate bond, which offers a 2.76 per cent interest rate.
The regulator stepping in
On 25 July, the financial conduct authority expressed its concern on low interest paying accounts, particularly customers who keep the same account for a long period of time.
“Providers can take advantage of high levels of customer inaction to pay lower interest rates to longstanding customers,” said Christopher Woolard, executive director of strategy and competition at the FCA.
The FCA mooted the idea of a basic savings rate set by banks and published on the FCA’s website with the aim of making it easier for people to switch accounts, as historically they have been slow to act.
This is just at proposal stage at the moment though and as with anything when minimums get published, what is the incentive to the provider of offering more than the minimum?
It’s possible that if interest rates rise again this year, there may be a rise in savings accounts rates, but crucially, while inflation continues to rise, low paying accounts lose value in real terms.
Choose an alternative product
Equally, rates on savings accounts may not rise to a satisfactory level for many savers in the short to medium term. If you want to take positive action, it is worth looking at alternatives products. If you’re looking to build a reserve of cash for the long term, you could look at contributing more to your pension or investments, including stocks and shares ISAs.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.
Equity based investments do not afford the same capital security as deposit accounts.
The Financial Conduct Authority does not regulate deposit accounts.
 Challenger banks drive improved savings rates, FT, July 2018 https://www.ft.com/content/4ce2bb22-8b5f-11e8-bf9e-8771d5404543