Why the interest rate on your savings should leap this month
The base rate has increased by 0.25 percentage points, but savers could see a far larger rise after the FCA launched an action plan to ensure higher interest rates are passed on.
It hasn’t just happened once or twice, today marks the 14th consecutive time the Bank of England has increased the base rate.
The base rate now stands at 5.25% as the majority of the Bank of England’s monetary policy committee voted to increase the rate by 0.25 percentage points. Only one member voted to keep the base rate at 5%.
The last time the base rate stood at 5.25% was 15 years ago in March 2008, during the financial crisis.
This is sobering news for borrowers and those with a mortgage as rates continue to climb despite inflation falling to 7.9% in June.
However, the Bank of England is still not happy, with inflation almost four times higher than its target rate, which is why it decided to increase the base rate once more.
But does this decision change anything for savers?
As we’ve seen from the previous increases, rates on savings accounts have also increased - albeit more slowly than we hoped.
So, this latest news should mean the interest rates on your savings also rises, meaning you can earn more interest on your money.
This expectation also feels warranted after banking watchdog, the Financial Conduct Authority (FCA), released a statement this week detailing exactly how they plan to hold banks to account for low rates.
The FCA said: “We’ve found that while interest rates on savings accounts have been rising, this has been happening more slowly for easy access accounts.
“Nine of the biggest savings providers, on average, only passed through 28% of the base rate rise to their easy access deposits between January 2022 to May 2023.
“Notice and fixed term deposits have seen greater pass through of rate rises, with these nine firms passing through 51% over the same period. There has also been significant variance between firms, with smaller firms offering higher interest rates on average than their larger competitors.
“Firms offering the lowest savings rates will be required to justify by the end of August how those rates offer fair value.”
This is good news for savers, as if they currently have their money sitting in a savings account with low interest, the FCA will be questioning banks to ask why they aren’t increasing rates.
Sheldon Mills, executive director of consumers and competition at the FCA, added: “It is critically important that customers can benefit from competitive interest rates to protect the value of their savings and that customers receive fair value from firms.”
An illustration of how savings rates have changed in relation to the Bank of England base rate over the two past years. The average rates have been calculated by taking the rates from the whole of market at the time of the base rate change. Source: Defaqto and Bank of England data.
Currently, the monthly average for instant access accounts stands at 3.13% and the monthly average for all savings accounts stands at 4.30% - both of which are well below the base rate of 5.25%.
Hopefully, with the FCA putting pressure on the banks and with the news of another base rate increase, we should start to see more competitive averages.
For now, the best way to get the most interest on your savings is to compare all savings accounts in the market. The averages might be weak, but there are some banks offering high interest rates of more than 6% on some savings accounts.
Help stretch your budget a little further by making the most of your savings.
About Lucinda O'Brien
As a trained journalist, Lucinda has spent the past 10 years writing and editing content for regional and national titles, including The Mirror, WalesOnline and Manchester Evening News. She is now a personal finance editor and specialises in savings, helping people to make confident financial decisions so they can save for what matters most.