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The returns on offer from fixed rate bonds have returned to levels not seen since the Bank of England made its most recent cut to the base rate just over a year ago.
The welcome news for savers is delivered in our latest Moneyfacts UK Savings Trends Treasury Report, which is due to be published later this week, and shows that the average rates now being paid on both one-year and long-term fixed rate bonds have recently been on the up.
Indeed, the typical one-year fixed rate bond now pays 1.13%, compared with just 1.00% in September 2016, straight after the Bank of England's rate-setters trimmed the official bank borrowing rate to its historic low of 0.25%. At the same time, savers looking for a long-term bond can now expect an average rate of 1.60%, compared with just 1.34% a year ago.
|Aug 2016||Sep 2016||Sep 2017|
|Average One-Year Fixed Bond Rate||1.12%||1.00%||1.13%|
|Average Long-term Fixed Bond Rate||1.56%||1.34%||1.60%|
|Rates exclude ISAs|
|Source: Moneyfacts UK Savings Trends Treasury Report|
"After the base rate cut, savings rates quickly fell to record lows, but today the average standard fixed rates are back to pre-base rate cut levels," said Charlotte Nelson, finance expert at Moneyfacts. "While over the months the increases may have appeared small, positivity seems to have slowly returned to the market, negating the effect base rate has had on the fixed rate bond market."
Leading the renaissance has been a new wave of challenger banks, such as Atom Bank, Ford Money and more recently Wyelands Bank, whose eagerness to make an immediate impression on the savings market has worked in the favour of savers. Unfortunately, Government-led policies designed to support the banks mean a full-blown recovery in rates seems unlikely to materialise just yet.
"All of this positivity wouldn't be possible without the fresh energy of the challenger banks, whose intense competition for the top of the Best Buys has kept rates rising," Charlotte elaborates. "Despite their best efforts, however, rate increases will likely remain small until the larger banks decide to join in. Sadly, until initiatives such as the Term Funding Scheme (TFS) are removed from the equation, the main banks are unlikely to change. While the TFS scheme is set to end on 28 February 2018, providers who access the scheme have four years to spend the funds, so subdued rates are likely to remain for some time."
Despite the recent rise in bond rates, saver behaviour has altered in recent months, with the Bank of England actually reporting an increase in the flow of money coming out of fixed rate bonds. "This shows that, at the moment, savers are reluctant to lock their cash away in an account that does not keep pace with the rising inflation rate," concludes Charlotte. "With savers still struggling to get a decent return on their savings pot, it is difficult to be positive. However, without the influence the smaller challenger banks have had on the market, it would be a very bleak picture indeed."
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