What next for savings rates? Here’s what the experts predict

Savings rates have risen explosively in recent months.

Since early May, the average one-year fix has increased from 3.96 percent to 4.83 percent, while the average easy access rate has fallen from 2.06 percent to 2.49 percent.

The This is Money independent best buy tables were a hive of activity with banks and building societies vying for the top spot.

Our savings alert service, which now has nearly 16,000 dedicated savers signed up, has activated best buy alerts almost daily.

Milestones have been reached and past predictions have been shattered.

At the beginning of May, the best fixed-interest savings deal reached 5 percent. Then, in the second week of June, easily accessible savings rates crossed 4 percent, and finally, last week, fixed rates crossed the 6 percent mark.

The decade-long era of floor rates seems to be definitely behind us – at least when we look at the best deals on the market.

Some savers may now be wondering whether we will get a fixed interest rate of 7 percent any time soon. We may even see the best rates for ease of access being 5 percent.

But there are others who believe that the music is about to stop. May we reach the dreaded peak…

Why are rates rising?

Smaller banks and building societies rely on depositors to finance their lending.

This has resulted in something of a price war at the top of the best-buy charts, but how long this will last remains to be seen.

The main driver behind rising interest rates is the shift in market expectations about how high the Bank of England will raise key rates.

Financial institutions have revised their forecasts as inflation has remained higher than expected, forcing the Bank of England to keep raising key rates to bring inflation under control.

Last month, the Bank raised the base rate from 4.5 percent to 5 percent. Markets now expect the base rate to be raised to between 6 percent and 6.5 percent.

Kevin Mountford, founder and CEO of savings platform Raisin UK, says: ‘Until recently it certainly looked like UK interest rates were peaking.

However, a number of factors, including continued stubbornness around inflation, made it clear that the Bank of England will have to keep raising interest rates.

“Hence the recent 50 basis point increase, and more could follow, plus the likelihood of interest rates falling is reduced to early 2024 at best.”

Will rates continue to rise or will we reach a peak?

Predicting the future of savings rates will always remain an imprecise science, because so much depends on how the economic situation develops.

The general consensus among industry experts is that the savings rate will continue to rise in the near term.

Sarah Coles, a personal finance expert at Hargreaves Lansdown, says: ‘We expect the Bank of England to continue to raise interest rates for the foreseeable future, and normally we expect easily accessible rates to rise at a time of rising rates.

“The most competitive banks usually take turns getting ahead of each other to attract more money.”

Up again: The Bank of England has raised its base rate for the 13th consecutive time since 2021

Whether they rise or fall from now on will depend on the broader economic picture, according to Coles.

She adds: “If inflation numbers match expectations, this will already be largely priced into one-year fixed rates, so we may not see dramatic movements there.

“On the other hand, we could see signs of inflation receding somewhat, so the Bank of England could pause interest rate hikes, and lower interest rate expectations for the future could mean that fixed rates are starting to ease.”

What do experts predict for savings rates?

Mr Mountford believes easily accessible rates are likely to improve between now and the end of the year.

He says: ‘The Bank of England’s base rate could reach 5.5 per cent or even higher by the end of the year and this will have a direct impact on easily accessible rates.

“Top interest rates are currently around 4.35% against the base rate of 5%, so some banks will use market conditions to make a margin turn at the Bank of England and there will be even more opportunities to take advantage of this in the future.” and as such the top rates can be continued to keep pace with future changes.

“That’s why I think we’re going to see a low threshold of 5 percent over the next three months.”

On the flat rate side, Mountford believes we’re approaching the peak.

He adds: “Fixed rates are harder to predict, but I don’t expect them to go much higher than they are now, although they could reach 6.25 percent before things settle down.”

Sarah Coles of Hargreaves Lansdown broadly agrees with Mountford.

She says, “If inflation is super-sticky, the best easy-to-access savings rates could get closer to 5 percent, and the best one-year fixes could be as high as 6.5 percent later this year.

The peak of the one-year fix will likely be earlier than easy access because it’s based on rate expectations.

Inflation stalled at 8.7 percent in the 12 months to May, higher than the Bank of England’s forecast of 8.3 percent.

Coles points out, however, that there are no guarantees that the Bank of England will raise rates as far as the market now expects.

“Any news that inflation is starting to make more sense could depress interest rate expectations, causing fixed rates to fall more quickly,” she adds.

Andrew Hagger, a personal finance expert at MoneyComms, believes easy access rates will peak at around 4.5 percent and around 6.25 percent for fixed-rate savings.

He says: “Until inflation is deemed under control again, base rates may rise further when the next MPC meets on August 3.

“In the meantime, we could see convenience access rates exceed 4.5 percent later this month and an annual fix near 6.25 percent.”