Interest rates to fall? Savers warned on fixed-rate bonds

Banks and building societies may have ‘over-egged the pudding’ by setting overly attractive rates in the expectation of larger Bank Base Rate hikes to come, according to some commentators.

Things have felt rather positive for savers of late.

The last decade has been little short of desperate for those hoping to get a decent return on the money they have saved.

Bank Base Rate spent years at record low levels, and banks and building societies didn’t have to do a lot to stand out from the crowd.

Even the top deals, therefore, were never at rates that got savers too excited.

However, we’ve seen things change recently. Since December the Bank of England has repeatedly increased the Bank Base Rate ‒ indeed last week it announced the biggest increase since 1989 to take it to 3%.

And those increases ‒ eight consecutive hikes in all ‒ have resulted in savers having a much more exciting range of deals from which to choose, delivering a healthier return on their cash.

In fact, as we have noted, the rates are so much better now that significant numbers of savers may find themselves paying tax on the returns for the first time unless they make use of their ISA allowance.

With Bank Base Rate expected to increase further from here, you might expect the interest rates on offer to improve still further, yet there have been warnings that rates may in fact have peaked.

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Over-egging the pudding

Some certainly think so. Anna Bowes, co-founder of Savings Champion, said that there were indications that the markets had “over-egged the pudding” and assumed that interest rates would rise to a higher level than they are actually likely to after all.

In other words, savings providers took the long-term view of where Bank Base Rate would likely end up ‒ the talk of 6% after the disaster of the mini-Budget for example ‒ and used that forecast as the barometer for setting the rates on offer from their accounts.

That’s rather different from being a little more reactive, moving the rates on offer as and when the Base Rate moves.

And if Bowes is right, it may mean that the deals on savings accounts are unlikely to get much better than their current level.

Indeed, it may be the case that as savings providers take stock of the likelihood that Base Rate will not reach the elevated levels they had expected they start to chip away at the rates on offer on their savings deals, reducing the returns on offer.

Bowes pointed to what she described as a “slowdown” in the one-year fixed-rate bond market of late. 

She noted that the top one-year bond rate had been stuck at around 4.6% for a couple of weeks, with little sign of providers keen to increase the rates on offer in order to attract more savers.

This was in contrast from the more active level of competition seen earlier this year.

She added: “As a result of this marked slowdown, we could now have seen the fixed-term bond market peak – at least for the time being.”

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Locking your money away

The selling point of bonds has always been that you get a better return on your cash by locking it up for a set period.

By sacrificing access to the money, you can boost the returns on offer markedly, making it an attractive idea if you are unlikely to need that cash in the short term.

And the longer you lock the money away for, the better the rates on offer.

For example, according to Moneyfacts, the best rate you can get on an easy access account today is 2.85%.

Yet locking the money up for a year would mean a rate of 4.6%, while you could secure a rate of 5.10% over five years.

Whether it’s a good idea to lock your money away for five years, given the state of economic uncertainty, is a separate question.

But the truth is that if you can do without the money for a year, a fixed-rate bond makes a lot of sense.

Acting now

Given the potential for savings providers to drop interest rates unless they feel the need to top the best buy tables, it makes a lot of sense for savers to consider their options now.

If Bowes is right, and rates really have peaked, then delaying moving your money into a new bond only risks you losing out on the best return possible.

As a result, being decisive about opening a new account could give your finances a boost.

That said, it’s unlikely that banks and building societies will be falling over themselves to slash the interest rates on offer.

The peak may have been reached rather quicker than expected, but that does not mean that the descent from here will be a sharp one necessarily.

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