Could savings deals now creep back above 5%? 

Could savings deals now creep back above 5% as continued inflation pushes rates up?

Persistently high inflation is putting further pressure on household budgets. But for savers there is a kind of silver lining.

Savers enjoy the best interest rates they have known for years thanks to the sky-high inflation. And some experts say rates could rise even higher.

Interest rates have risen since last week as official figures showed that inflation remains stubbornly high. Inflation is now at 10.1 percent and has been running in the double digits since September last year.

Savers can now enjoy a top deal on a one-year fixed rate 4.7 percent account, currently offered by Shawbrook Bank and Close Brothers Savings. The best deal at the beginning of this month was lower, at 4.35 percent.

Savers can get similar rates even if they want to lock up their money for longer.

Top deal: Savers can now enjoy top interest on a one-year fixed rate account of 4.7%, currently offered by Close Brother Savings and Investec Bank

The top five-year rate is 4.65 percent from Atom, 4.61 percent from United Trust Bank, or 4.6 percent from Monument Bank and Tandem Bank.

The three-year rates are around the same level with the best rate of 4.67 percent from DF Capital.

The caveat, of course, is that high inflation erodes the value of your savings over time, meaning every pound won’t stretch as far in stores.

Can the rates go even higher?

The Bank of England is relentlessly raising interest rates to curb rampant inflation. Last year around this time, the base interest rate was only 0.75 percent, now it is 4.25 percent.

But despite all efforts, inflation is still not under control. This means that at its next interest rate decision in two weeks, the Bank may choose to raise interest rates even further, to 4.5 percent.

In fact, money market traders are betting that the Bank of England could raise key interest rates to a peak of 5% later this year.

Until recently, they predicted interest rates would level off at 4.5 percent, but stubbornly high inflation forced a rethink.

If base rates continue to rise, the interest rates available to savers may rise as well. The level of the base interest rate is one of the largest factors that savings providers take into account when pricing their deals.

Where to find the best deals

Even if the base interest rate rises, savers do not automatically see the benefit. Banks and building societies are often slow to pass on interest rate increases to savers, especially the larger High Street banks.

Savers will have to shop around to find the best deals.

In particular, multi-year fixed-income bonds may not rise in line with base rates. That’s because providers set their rates based on what they believe the base rate will achieve in the future, as well as at current levels.

For example, if they think interest rates will fall to 2 percent in the coming months, they don’t want to continue paying interest rates close to 5 percent for years to come.

Need to fix longer?

Rates may continue to rise, but there is no guarantee. A spokesperson for the Savings Guru website says it’s not worth waiting for a better rate.

“We think that fixed rates have peaked and will come down, but there could be some short-term swings,” he says.

“It is a gamble to wait, hoping for higher rates. All savers who lock in for a year will receive a lower offer on the final maturity date.

“If you want the highest rates, you should take the best three- or five-year fixed rates currently on offer.”

Some experts predict that rates may even begin to fall in the coming months.

Adam Thrower, head of savings at Shawbrook Bank, which is consistently among the top payers, says: ‘There could be a few more rate hikes from the Bank of England before things start to slow down, but the consensus is definitely that we’ll get to the top of the savings peak, we could even see an interest rate turnaround.’