As the Bank of England presses ahead with further increases to the base rate, which rose to a 15-year high of 5 per cent in June, many savers will be wondering when they will see similar returns on their deposits.
But data shows that banks are not passing on those higher rates to their customers, despite widespread criticism for not doing so. The financial regulator has received several complaints that customers are not receiving better returns, and has asked for banks to reveal exactly how they set savings rates.
Even the Chancellor, Jeremy Hunt, said this week that high-street lenders are “taking too long” to pass on increases in interest rates to savers, adding that people with instant-access accounts were being particularly hit by the “issue that needs solving”.
With the Bank of England set to rise rates yet again at its next meeting, here’s when you might expect your own bank to pass that higher interest on to you.
Why haven’t banks passed on higher rates to customers?
Any rise in the central bank rate boosts a bank’s income, therefore: the amount that they can claw back from customers tends to raise faster than the amount they pay out in interest on deposits.
UK Finance, the trade body for the banking sector, previously said that saving and mortgage rates “aren’t directly linked and therefore move at different times and by different amounts”.
The latest industry figures show that this gap is growing wider. In December 2021, when the Bank first started increasing rates, the average two-year fixed mortgage rate was 2.38 per cent while the average easy access savings rate – the most common type of savings account – was 0.19 per cent, a gap of 2.19 per cent, according to financial data firm Moneyfacts.
As of Monday, the average two-year mortgage deal hit 6.23 per cent and the savings rate was 2.36 per cent, a gap of 3.87 per cent.
When will savings rise rise?
It is not clear, but the biggest lenders are still dragging their heels when it comes to matching the central bank rate.
According to the Bank of England’s own report, the “pass-through” from it’s increased Bank Rate to instant access accounts, where around 60 per cent of household deposits are held, as “muted”. Its data, based on a sample of banks, shows the average instant access account rate rose by just 1.42 percentage points between November 2021 and March this year, despite its base rate rising from 0.1 per cent to 4.25 per cent in that period.
As of Monday, Barclays pays 0.85 per cent on its easy access Everyday Saver; HSBC 1.35 per cent on its easy access Flexible Saver; and NatWest 1.11 per cent on its Flexible Saver account for savings under £25,000.
However, according to Moneyfacts, the gap between what banks charge and what they pay customers has narrowed since December 2022. That may give savers some hope that rates will start to rise in the coming months.
Analysts are predicting that the Bank’s interest rate could peak at as much as 6 per cent by the end of the year, with inflation proving stickier than feared. Combined with pressure from the government and regulators, high-street banks may start to increasingly reflect that higher rate for savers.
How can I find the best rates?
The best returns are available to savers who don’t mind giving up easy access to their money. If a customer locks their cash away for 12 months – in what is known as a “fixed-rate” savings account – they can get rates as high as 6 per cent at some lenders.
At present, the best fixed-rate deals are offered by SmartSave, whose one-year fixed account pays 5.71 per cent interest; Close Brothers, which pays 5.7 per cent on its two-year fixed deal; and RCI Bank UK, which offers 5.55 per cent on its five-year bond.
Meanwhile, those who can commit to putting away a fixed amount of money each month can get a return of 7 per cent from high street lenders. For example, First Direct’s regular saver account lets borrowers put away £300 each month and pays a maximum of £135 on a balance of £3,600 after a year.
Those who look away from the high street can find even better rates: Saffron Building Society pays 9 per cent interest on its regular saver account, but only allows deposits of £50 per month from existing members. Meanwhile, Skipton Building Society offers 7.5 per cent on up to £3,000 a year, but only to members who have been customers since 31 May.
Savers who want full control of their money will still want to find an easy-access account, with the best rates offered by smaller specialist lenders. Though they are less well-known, money held by these banks is still covered by the Financial Services Compensation Scheme.
The best rates can be found at Principality Building Society, which pays 4.15 per cent AER; Oxbury Bank, which offers 4.11 per cent AER; and Sainsbury’s Bank, which has a rate of 4.01 per cent AER.
