Have savings rates now peaked thanks to lower inflation reading?

I currently have a pot of money in an easily accessible account that pays me just over 4 percent.

I won’t need this money for a year or so. I wonder, given this week’s inflation news, are fixed rates now peaking or about to fall?

If so, would now be a good time to close a 6 percent deal for the next 12 months?

Ed Magnus of This is Money replies: Savers may be wondering if we’ve reached the top.

Earlier this week, the consumer price inflation measure fell to 7.9 percent in the 12 months to June, lower than market expectations of 8.2 percent.

This may sound like more of the same – after all, the Bank of England’s inflation target is 2% – but markets reacted as if this was some sort of turning point.

Forecasts for the Bank of England’s key interest rate spike were almost immediately cut from 6.5% to less than 6%. Some are now predicting that the base rate could peak at 5.5 percent.

Swap rates – which banks and building societies use to price their fixed mortgage and savings products – also fell.

But base rate forecasts could be revised higher at the next inflation reading in August, but based on the new trajectory, the rise of fixed-rate savings could reach its peak.

However, savers should probably expect easy access rates to continue to rise, as they are often priced in response to base interest rate movements, as opposed to fixed rates that are priced forward.

Since early June, the average fix for a year has increased from 4.21 percent to 5.14 percent, according to Moneyfacts, while the average easy access rate has increased from 2.21 percent to 2.62 percent.

The best one-year fixed-rate deal currently pays 6.15 percent, and there are currently 20 providers paying more than 6 percent.

Meanwhile, the best easily accessible rate currently pays 4.51 percent.

If our reader put £10,000 into the best one-year fix, he could expect to earn £615 in interest over the next 12 months, compared to £451 in the best easy access account.

However, the £615 is guaranteed, while the £451 is not, as the easily accessible rate is variable and can rise or fall over the next 12 months.

Of course, the one major downside to a fixed-rate savings deal is that the money isn’t available for the life of the deal.

We decided to talk Anne Bowesco-founder of advice website, Savings Champion and James Blowerfounder of the website, The Savings Guru, to see how they would advise our reader.

Have rates peaked?

James Blower replies: The honest answer is that no one knows where the rates will go. However, the Bank of England has raised key interest rates to bring inflation down.

Yesterday’s inflation news suggests it could finally work for them – but remember, the numbers are still well above the 2 percent target.

We still think that the base rate will rise to 6 percent this year, but the current one-year fixed rates from savings providers settle the next 12 months with a base of at least 6.25 percent.

If your reader doesn’t think that’s likely to happen now, then it’s unlikely they’ll get better rates than they’re being paid right now.

On Savings Guru this week we saw a wave of interest in five-year fixed rates, which we believe are the savers reacting to the news, expecting rates to fall and getting in on what they think is likely the peak.

Anna Bowes adds: Market sentiment around what is likely to happen with base rates at the next meeting has shifted quite a bit and it looks like the Bank of England may not have to go as far as previously predicted.

There is now a 60 percent expectation that the base rate will rise 0.25 percent at the next meeting on August 3 – but before today it was expected to rise again by 0.5 percent.

This means that Sterling Overnight Index Average (SONIA) rates have also fallen – reflecting the average of the interest rates that banks pay to borrow Pound Sterling from other financial institutions overnight and are another indication that we may be close to the top of the interest rate cycle this time around – and especially with regard to interest rates on fixed-term bonds.

Should they switch to a flat rate?

Anna Bowes replies: With the possibility of the interest rate cycle approaching its peak, if you don’t need all of your cash right away, I’d say it’s a good idea to consider committing a little longer to hedge against rate drops in the years to come.

While even the best rates in the market can’t beat inflation right now, if and when inflation falls further, those who have their money tied up could find themselves in the enviable position of earning more interest than inflation if the Bank of England manages to bring inflation closer to its 2 percent target, especially if you’ve held onto some of your money for longer.

But psychologically you may need to remind yourself that it’s about the longer term as the long term rates pay less than the shorter term.

That is another indication that the market expects interest rates to fall again in the coming years, although nowhere near the levels we had seen.

James Blower replies: If your reader absolutely does not need access to their money, it makes sense to lock up the money since the best one-year interest rate is now 6.15 percent.

If they’ve saved £10,000, that’s an extra £200 in interest they can earn. Regardless of where the prices go, that’s a significantly higher return.

They may also consider fixing some and keeping some easily accessible for emergencies.