Savings News

Savers hoping that the savings market will bounce back quickly from the Coronavirus pandemic will be disappointed by research that has found the market is facing similar a significant impact to that seen in the aftermath of the 2008 economic crisis and the 2012 funding for lending (FLS) launch.

At times of financial crisis savers tend to opt for easy access accounts as they enable quick access to funds. Our research has found that in the three months since the Coronavirus pandemic began impacting the UK economy, the average rate on an easy access account has halved, from 0.60% available on 11 March 2020 to 0.30% today. This compares to the 2008 financial crash, when average easy access account rates fell by 1.72%, from 3.90% on 15 September 2008 to 2.18% on 15 December 2008. During a three month period in 2012 the average rate on an easy access savings account fell by 0.04%, from 1.14% on 13 July 2012 to 1.10% on 15 October 2012.

“The financial crash in 2008 and the launch of FLS in 2012 had catastrophic effects on the savings market and the latest shake-up caused by the Coronavirus pandemic should not be taken lightly,” said Rachel Springall, finance expert at Moneyfacts.co.uk.

“Savings providers have less reason to improve their range of deals to entice savers right now as they have support available from the Government to fund their future lending.

“Until savings providers desire savers’ cash once more, we are unlikely to see an influx of deals climbing the top rate tables – in fact, we are more likely to see a race to the bottom to cope with demand or see deals with a very short shelf life.”

Clearly savers have faced challenging markets in the past, however this year savers have the added challenge of average easy access rates starting at a lower rate than in previous years. In addition to this, in March the Bank of England cut base rate to its lowest level in history of 0.1% and the Bank has negative interest rates under ‘active review’.

Sadly, despite last week’s fall in the inflation rate to 0.8%, the ISA market continues to be somewhat fluid, with both rates and product availability still heading in a downward direction. However, there are bright spots for those who are still looking for the best, inflation-beating rate when it comes to a range of ISAs. Happily, the top products in the fixed rate, easy access and notice ISA categories are still offering rates that beat the current level of inflation – although it must be stressed that these could be withdrawn with little notice so consumers would be wise to act quickly to secure these deals.
As ever, savers should be aware that although we have included ISAs that can be opened and managed in branch, consumers are advised to check with the bank or building society to ensure this service is still available, as many are only providing essential banking services in branch at the moment due to the Government’s restrictions on movement.

There’s been quite a bit of change in the savings charts since our last round up a week ago. Several products and providers that were featuring prominently have dropped out of the tables and overall interest rates are noticeably lower than those of last week too.

Although inflation currently remains at 0.8% savers may not be able to rely on finding inflation-beating rates available in the charts forever. While rates as high as 1.90% AER continue to be available in the fixed rate bond charts, savers looking to secure the best rates are urged to act quickly as it is likely that savings rates will continue to fall over the next few months.

Savers are sacrificing better rates available by locking into long-term accounts and are instead opting for short-term accounts.

In research published in an independent white paper covering the savings market, traffic data from Moneyfacts.co.uk found that consumers were favouring one year fixed rate bonds over those with longer fixed terms. In fact, the research revealed that one year fixed bond traffic achieve a 44% share of total website visits* for fixed rate bonds, while five year fixed bonds was just 10%.

Along with the increase in popularity of short-term bonds, our research also found that the difference in the average rate being offered on one year fixed rate bonds and five year fixed rate bonds has narrowed in the past year. As the below table shows, during January 2016 the difference in average rates between one and five year fixed rate bonds was 1.17%, while during May this year it was just 0.39%. A similar picture can be seen within the ISA market, with the difference in average rates between one and five year ISAs standing at ISAs standing at 0.94% in January 2016, while during May this year it was down to 0.42%.

Savings market analysis - average rates 

Commenting on the research, Rachel Springall, finance expert at Moneyfacts.co.uk, said: Savers appear to be eyeing up shorter-term bonds to acquire a competitive rate of interest, guaranteed to be paid for the next twelve months, and less so eyeing up longer-term fixed deals. As it stands savers may not want to lock their money away beyond a year and in fact, interest rates on five-year fixed bonds may not be enough for them to consider.

“The difference in rate offered on one-year and five-year bonds has fallen by two thirds between January 2016 and today which is a huge change, indeed the differential rate was 1.17% but it is now 0.39%. This means there is less incentive for savers to choose a five-year bond over a one-year option.

“A similar pattern can be seen on ISAs, so those savers who turn to these tax-free vehicles year on year will see less reason to lock their cash away for five years. Indeed, the differential rate has halved compared to four years ago in January, down from 0.94% to 0.42% today.

“In light of these developments, savers may well be rushing to secure a competitive rate over the next twelve months before rates worsen, and as it stands there may be less demand for long-term bonds as the months progress.”