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Could a base rate rise improve my savings rate?

Could a base rate rise improve my savings rate?

Category: Savings

Updated: 14/07/2017
First Published: 14/07/2017

It's now been a decade since we had a base rate rise – the last one occurred in July 2007, when it went from 5.5% to 5.75%. That kind of level seems almost incomprehensible compared with today's rate of 0.25%, but with murmurings of a rate rise happening in the not-too-distant future, we could soon be edging back towards those levels. But could it improve savings rates?

Many savers are pinning their hopes on this very situation, with average savings rates having dropped dramatically since base rate was cut to 0.50% in March 2009, and even more so since it fell to its historic low of 0.25% last August. There have been some slight improvements of late, but we're still a long way from truly growth-generating returns, so it's hoped that a base rate increase could kick-start the market and encourage providers to start boosting their own rates.

Well, it's a nice thought, but unfortunately, there's nothing to say that this would be the case, nor how beneficial it would even be if it was. First off, "there's no guarantee that savings providers will pass on a significant rate rise onto their products if base rate were to increase," said Rachel Springall, finance expert at Moneyfacts, "and even if this were to happen, savers will still need to compete with rising inflation eroding their cash".

After all, it's long been said that, when base rate eventually rises, it'll do so only gradually; this means that even if providers passed on any increase in rate, it wouldn't be much, and it certainly wouldn't lead to the majority of savings rates beating inflation – which currently stands at 2.9% and is expected to rise further – anytime soon.

It's also worth noting that any increase in rate may not be seen across the savings market. Rachel explains that variable savings rates would likely see the quickest improvement, as these are more easily changeable and more closely linked to external factors, particularly base rate. Given that the average easy access rate is currently 0.38%, any increase would be welcome, but savers may need to look to other options to secure the best returns.

Fixed rate bonds tend to offer the best savings rates, but even these savers will need to carefully weigh up their options should base rate rise. They may be tempted to jump straight into a new deal at any hint of a rate rise, but what if they were to rise further?

"Savers who are tied into a fixed rate bond would need to work out whether they can escape their deal and how much it will cost them," explained Rachel, with some deals forbidding early access and others implementing hefty interest penalties for withdrawals. "Otherwise, they will need to hold the bond for its duration."

Ultimately, there's the potential for a base rate rise to improve savings rates, but don't get your hopes up! Any rise is expected to be minimal and providers may not pass the full increase on anyway, but this underlines the importance of comparing savings rates so you can be confident you're getting the best deal possible, no matter what's happening in the wider economic world.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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