The Bank of England has slashed hopes of interest rates rising above their current historic low of 0.5% until at least next spring, whilst its own data shows savers are abandoning fixed-rate products.
Here, we question whether fixed-rate accounts are the way forward for savers.
Bank of England broadens scope of ‘forward guidance’
Interest rates have remained at a low 0.5% since 2009. In August 2013, the Bank developed its forward guidance policy, which stipulated that a rise would only take place once unemployment dropped to 7%.
However, with unemployment falling to 7.1% in November 2013, the Bank has moved to ensure interest rates remain low for the next year by broadening the scope of this policy, so it also takes the overall performance of the economy into account.
Naturally, this is not good news for savers who may have hoped for an imminent rise in the interest rate, as such rises usually lead to rises in rates on savings products.
The low interest rate appears to have an impact on the amount of savers withdrawing their deposits from fixed rate products. Bank of England data shows that British savers held £281billion in fixed-rate and notice accounts in December 2012, but this fell to £238billion by December 2013.
How to get the best deal on savings in the current savings market
Cash Isas could be a useful alternative to fixed-rate savings accounts. Savings held in a cash ISA will be held tax-free up to a limit of £5,760 for this tax year. This limit will move up to £5,940 in the new tax year (which begins on April 6). See our guide on the best cash ISA rates for more information.
Savers might also choose to earn interest by keeping deposits in an instant-access savings account. Be sure to check out our guide on the best rates available, as switching will often improve the rates you receive on your savings.
It’s worth checking to ensure you are getting a reasonable rate of return on your deposits, as many savers are unwittingly saving into “zombie” accounts paying very low interest rates in the region of 0.1-0.2%.
Fixed rate savings products currently offer better rates of return, but many savers will prefer to remain flexible with an instant access account, in the hope of better rates in coming years.
- Best Rate Savings Accounts – more than 65 accounts rated
- Best Rate Cash Isas – a tax-free alternative to traditional savings accounts
- Call the Which? Money helpline – our financial experts can help with your savings query