UK interest rate rises to 5.0% – how to get more from your savings

The Bank of England (BoE) has increased rates again – by 0.50% to 5.0%.

This was all-but nailed on after the rise in core inflation announced towards the end of May, and the size of wage hikes revealed in June. Both convinced the markets that inflation is still a threat, and that we could well see several rate rises from here.

At a time of rising rates, you might be tempted to hang fire in case savings deals get even better in the coming weeks. However, this rate rise was already priced into savings. On 24 May, when the inflation figures emerged, the average one-year fixed rate was 4.13%, whereas now it’s 4.48%.

Where do rates go from here?

Forecasting rates is notoriously difficult. Banks are expecting further rises to 5.75% this year. If they materialise, it’ll come as no surprise, so the reaction might be muted. However, if weaker data emerges, and we get signs that inflation is falling, we might not get all of those rises after all, so savings rates could fall.

If these rises do come to pass, rates are then expected to stay elevated for a period, and then drop back. We can see this from the fact that some five-year fixes are offering lower returns than one-year fixed rates. Over time, this will filter through into rates across the board.

It means it’s definitely worth considering fixing if you are able to lock your money away while fixed rates are at their highest level in years.

It’s difficult to take the plunge when rates look like they are creeping up, but you need to work out the point at which you’re happy to fix. You won’t be able to spot the top of the market until after it’s passed, and rates are on their way back down again. It means it’s worth considering whether you’re happy with rates as they stand at the moment.

If beating inflation is your main concern, the fact that it’s expected to fall to around 5% by the end of the year, could make competitive fixed rates look attractive.

There’s also the question of the best possible period to fix your savings for. You’re typically rewarded more for fixing for longer. But, right now, some competitive five-year rates are lower than one-year rates.

However, if interest rates are set to drop back a year or so down the line, then if you definitely don’t need this money for five years, a five-year fix could make sense. If the forecasts are right and we do get rate cuts within the next year or two, then when shorter-term fixes mature, fixed rates could be lower.

This article isn't personal advice. If you're not sure what’s right for you, seek advice.

Finding what’s right for you

In the end, you should be driven by your needs and how long you are able to tie your money up for as you cannot access your money until the fixed term ends.

You could consider a ‘portfolio’ approach – where you break the cash into chunks depending on when you need it.

If you’re in work, you should have three to six months’ worth of essential expenses in easy access savings as your emergency savings.If you’re retired, you should hold one to three years’ worth.

However, the rest of your savings can be fixed for the periods that make the most sense. This helps you get the highest possible rates today for each portion of your cash.

If you save through a cash savings platform like Active Savings,you can keep an eye on all your savings in one place – which makes multiple accounts far easier to manage.

Through one online account you can access a range of easy access and consistently competitive fixed rate products offered by our banking partners. As your needs change, you can switch between products in a few clicks.

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