Are savings accounts keeping up with the Bank of England’s base rate?

Interest rates on savings have increased over the past year, but that’s only part of the story. 

That is because, despite the rises, interest rates on most savings accounts are now lagging behind the Bank of England base rate, while inflation is more than double even the best rates on savings accounts.

This means savers might be feeling disappointed as their money is ultimately losing purchasing power as prices rise faster than their interest can keep up with. 

However, there are some savings accounts that are aligning with the base rate and could provide a good opportunity to lock in a competitive interest rate for years to come. 

Boosting interest

At the beginning of this year, interest rates had increased by more than 400% in a year, which was some positive news for savers if they had a lump sum to save. 

Similarly, our data highlighted in February that easy access savings accounts were paying people more than they had in years, with banks boosting rates to above 3%. The increase of interest rates on savings is always welcomed, but it hasn’t reached the heights that some might have expected. 

Banks are not required to increase their rates to match the Bank of England’s (BoE) base rate. Instead, banks focus on balancing the money they have in deposits with the amount they lend. 

If they need more deposits, then they might increase interest rates to entice savers and beat their competitors. This means the banks are more interested in their rivals than the BoE’s activity. 

How rates compare

But let’s take a step back and look at how interest rates have compared with the ever-changing base rate in the past year. 

Take the average interest rate for an easy access account in February 2022, which was 0.43% and the maximum interest rate was 0.75%. At this time, the base rate was 0.5% which highlights that generally easy access accounts were sticking close to this rate.

It’s a different picture this month, as the average interest rate is 2.22% for an easy access account and the maximum interest rate is 3.6% - which comes from Yorkshire Building Society’s Rainy Day Account. The base rate currently stands at 4.25%, so easy access accounts are now failing to keep up with the base rate. 

In comparison, the average interest rate for a one-year fixed-rate bond in February 2022 was 0.79% and the maximum interest rate was 1.6%. With the base rate at 0.5%, this is a prettier picture for savers. 

Fixed-rate bonds are still looking strong against the base rate but not every provider will match or exceed today’s base rate of 4.25%. The average for a one-year fixed-rate bond is 3.86% but the maximum interest rate is 4.72%, which comfortably exceeds the base rate. 

This top interest rate comes from My Community Bank and it is currently offering one, two and three-year fixed-term bonds which all beat the base rate. Similarly, Castle Trust Bank’s one-year fixed-rate Cash ISA is matching the base rate as its interest rate is 4.25% with a deposit of at least £1,000. 

Thinking long-term 

This means if savers would like an account that is keeping up with the base rate, a fixed-rate bond is a good place to start your search. Long-term saving is also a great way to lock in a competitive interest rate now in case rates start to drop in the future.

On the other hand, if the Bank of England continues to increase its base rate and banks decide to follow suit, you could miss out on more interest. This is always the predicament savers face, so it’s always best to explore the different savings accounts available before making a decision.