I have a considerable amount of money in an easily accessible account that yields slightly over 4 percent in interest. I won’t need this money for about a year. Given the recent news about inflation, I’m wondering if fixed rates have reached their peak or if they are about to decline. If that’s the case, would now be a good time to secure a 6 percent deal for the next 12 months?
There’s been a rapid increase in fixed rate savings deals in recent weeks, but with the latest inflation news, some experts are speculating whether they have reached their peak. Ed Magnus of This is Money suggests that we may have reached the top.
Earlier this week, the Consumer Prices Inflation measure for the 12 months leading up to June fell to 7.9 percent, below market expectations of 8.2 percent. This change has raised eyebrows and prompted the revision of peak forecasts for the Bank of England base rate, dropping the estimates from 6.5 percent to below 6 percent. Some even speculate that the peak may now be at 5.5 percent.
As a result of this news, swap rates, which banks and building societies use to determine the pricing of their fixed mortgage and savings products, have also fallen. This indicates that fixed rate savings deals may have reached their zenith.
On the other hand, easy-access rates are expected to continue rising as they are linked to base rate movements, unlike fixed rates which are determined in advance. Since the beginning of June, the average rate for a one-year fix has increased from 4.21 percent to 5.14 percent, while the average rate for easy-access has risen from 2.21 percent to 2.62 percent.
Currently, the best one-year fixed rate deal pays 6.15 percent, and there are 20 providers offering more than 6 percent. In comparison, the top easy-access rate is 4.51 percent.
For example, if you were to invest £10,000 in the best one-year fix, you could expect to earn £615 in interest over the next 12 months, compared to £451 in an easy-access account. However, it’s important to note that the £615 is guaranteed, while the £451 is variable and subject to change.
One downside of a fixed rate savings deal is that you won’t have access to your money for the duration of the deal. To get expert advice, we spoke with Anna Bowes, co-founder of Savings Champion, and James Blower, founder of The Savings Guru.
James Blower cautions that it’s difficult to predict where interest rates are heading, but given the Bank of England’s efforts to combat inflation by increasing the base rate, it’s possible that rates will continue to rise. However, the current one-year fixed rates already incorporate a base rate of at least 6.25 percent in the next 12 months. If this is unlikely to happen, then it’s unlikely that better rates than the current ones will become available.
On the other hand, savings experts are noticing increased interest in five-year fixed rates, which suggests that savers anticipate rates to decline and are taking advantage of what they believe is the peak. With falling inflation and rising savings rates, savers have a realistic chance of earning a return that beats inflation.
Anna Bowes points out that there has been a significant shift in market sentiment regarding the base rate at the next meeting. The expectation of a 0.5 percent rise has decreased to 0.25 percent. This decrease is also reflected in the Sterling Overnight Index Average (SONIA) rates, indicating that we may be nearing the top of the interest rate cycle. This is particularly relevant for fixed term bond rates.
Considering the possibility of the interest rate cycle nearing its peak, Anna Bowes suggests that if you don’t need immediate access to your cash, it’s wise to lock some of it up for a longer period to hedge against future rate decreases. Although the best rates currently available still don’t beat inflation, as inflation falls further, those who have locked up their cash have a chance to earn more interest than inflation if the Bank of England manages to bring it closer to the 2 percent target.
James Blower advises that if you don’t need immediate access to your funds, it’s worth considering a fixed rate since the best one-year rate is currently 6.15 percent. For an investment of £10,000, that’s an additional £200 in interest compared to an easier accessible account. You may also want to consider securing a portion in a fixed rate and keeping some in an easy-access account for emergencies.
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