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Fixed savings rates fall dramatically

Fixed savings rates fall dramatically

Category: Savings

Updated: 15/03/2016
First Published: 17/02/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Well, it's been another poor start to the year for savings rates. Not only has our data shown that the number of individual rate cuts has now vastly outweighed the number of rate increases for the fourth consecutive month, but new figures show continued reductions in average rate across much of the savings market, and it's the fixed sector that's seen the most dramatic falls.

Reversal of fortune

The figures speak for themselves: the average one-year fixed rate saw the biggest drop, falling by a considerable 0.07% to stand at 1.36%, the lowest seen since May 2014 when the figure stood at 1.28%. The average long-term rate also saw a clear reduction, down by 0.06% to 2.03%, bringing it to a seven-month low.

The picture was slightly more mixed in the ISA sector, with the average long-term ISA rate falling by a lesser 0.01% (to 1.87%), while the average one-year ISA rate saw an increase of the same amount, rising by 0.01% to 1.41%. This was the only average across the market to see an increase, but despite this, both fixed ISA rates remain among the lowest seen.

However, it's the change in direction of the fixed sector as a whole that's particularly significant: our figures had previously revealed general rate increases in this area for much of last year, but it seems that the run of positivity has categorically come to an end.

Apathy returning

It had been hoped that the maturity of the first one-year Pensioner Bonds would trigger an influx of rate increases as providers sought to compete for the new-found pool of money, but instead, the opposite appears to be occurring – rather than compete for business, providers are actively cutting rates, with there being no desire whatsoever for them to attract new savers.

A general feeling of apathy has returned to the fixed sector of the market, and indeed, to the savings market as a whole, with the variable sector also seeing further rate cuts: the average no notice cash ISA and notice cash ISA rates both fell by 0.01% to 1.06% and 1.19% respectively, which means both have now hit new lows.

Meanwhile, the average no notice rate (excluding cash ISAs) fell by 0.01% for the third consecutive month to 0.63%, the lowest seen since July 2014. The notice rate hasn't fared any better, either, and in fact has fallen for the first time in three months, with a reduction of 0.04% bringing the average to 0.81%.

This is particularly worrying given the pattern of recent months. Challenger banks remain the most dominant players in the notice sector and had previously appeared to be actively competing, arguably as they still needed savers' cash to build their balance sheets. However, there's been speculation over how long even this level of competition would last, as at some point even challengers would no longer need additional funding, and the figures suggest that this threshold could have been met.

A not-so-bright future

There's still potential in the challenger market, as although the current batch appears reluctant to compete as intensely as previously, there are several new banks in the application pipeline, which could lead to more competition and higher rates when they launch.

However, it could be a while before this takes effect, and for the time being at least, the overall trend remains clear: average savings rates are on a downwards spiral, and it's widely expected that this will continue. Much of this can be attributed to recent Bank of England announcements regarding base rate, which have provided further fuel to the rate-cutting fire.

Essentially, base rate is now expected to stay low for at least the next year, with some economists predicting that it'll remain on hold until the end of 2017, and there's even a suggestion that it could be cut further. As a result, there's little reason to expect savings rates to move in the opposite direction, as providers simply have no reason to raise them.

Unfortunately, this means that all sectors of the market have the potential to see further rate cuts in the months ahead, but particularly the fixed sector, so we may not have much good news to share with you for the foreseeable future.

This is why it's more important than ever to consider your savings options thoroughly – don't settle for the first account you come across but compare the options so you know you're getting the best rate you can, because it's all about making your money work as hard as possible, even in the current low-rate environment.

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.