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Fixed savings rates hit significant new lows

Fixed savings rates hit significant new lows

Category: Savings

Updated: 23/03/2016
First Published: 23/03/2016

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 It is now over 6 months old so the content may be out of date.

Unfortunately, we still don't have much (or any) good news for savers: our figures show that it's been another month of rate cuts for much of the savings market, with the fixed sector seeing particularly notable reductions. This resulted in most average fixed rates reaching fresh lows, and marks the first time in three years that rates have fallen to such an extent.

Dramatic reductions

The figures show that all sectors bar one saw rate cuts this month, with only the no notice cash ISA rate remaining unchanged at 1.06%. However, this means that it remains the lowest rate ever seen in this sector, and it's a similar result for the notice cash ISA rate: it fell by 0.1% for the second consecutive month to reach 1.18%, another record low.

Other rates in the variable non-ISA sector also fell – both the average notice and no notice rates fell by 0.02%, resulting in the no notice rate standing at 0.61% (the lowest seen since April 2014) and the average notice account rate reaching 0.79%, the first time the rate has dropped below 0.80% since May last year.

However, it's in the fixed sector of the market where the most dramatic reductions can be seen. The one-year fixed rate and one-year ISA rate both fell by 0.07% to stand at 1.29% and 1.34% respectively, while the long-term rates saw even more considerable falls of 0.17% (non-ISA) and 0.18% (ISA). This means that the average long-term fixed rate now stands at 1.86%, while its ISA counterpart is at 1.69%, with both one-year rates and the long-term non-ISA rate being the lowest ever recorded.

Contextually significant

The findings become even more notable when considering the extent of the reductions. Given how low rates already were, movement of this magnitude is highly significant: rate movements are typically less than 0.05% either way, and the last time both long-term fixed rates saw such substantial drops in the same month was in January 2013, when they both fell by 0.22%.

Not only that, but the fact that ISA rates have fallen so significantly given that we're in the midst of what has traditionally been thought of as ISA season is even more telling, and suggests that the market could be in for the worst ISA season on record. Add in the fact that the fixed sector had been a key focus of competition for much of last year, and the swift turnaround becomes even more surprising. So just what's caused it?

Growing uncertainty

Analysis suggests that much of these rate drops can be attributed to general uncertainty in the market, together with a clear lack of desire to compete for savers' funds. Providers are still unsure about the potential effects of the personal savings allowance – from April, the first £1,000 in interest earned each year will be tax-free (the first £500 for higher rate taxpayers) – and how it'll impact the ISA sector in particular, while Brexit uncertainty will undoubtedly be an influencing factor, too.

Not even the maturity of one-year Pensioner Bonds has been enough to encourage providers to compete – if anything, it's had the opposite effect and has contributed to the ongoing rate decline, as providers want to avoid being inundated with this excess pool of money.

It looks as though there's a rush to get to the lowest rung of the ladder. Providers, mainstream ones in particular, are continually cutting rates as they simply don't want savers' money, which then prompts a reaction from the rest of the market and initiates a cycle: mainstream cuts push smaller banks towards the top of the charts, but if they don't want money either, they're forced to follow suit and reduce rates.

You only need to consider how many rate cuts have occurred in recent weeks to see that this is coming to fruition. Our data also shows that almost half of providers cut rates during the month, and that the number of rate cuts has now outweighed rate rises for the fifth consecutive month: as we reported yesterday, Moneyfacts recorded just 12 savings rate rises during February, while the number of rate decreases over the same period added up to a staggering 235.

How low can they go?

Well, the future isn't looking all that bright. Even challenger banks appear reluctant to compete, and there was a time when these smaller banks were the sole drivers of competition; now, we appear to have reached the stage where they've built their balance sheets so there's no need for them to stand out and beat their competitors, and even if they do still need funds, the fact that rates are so low elsewhere means they don't need to offer particularly competitive deals in order to attract savers.

Unfortunately, our current estimates point to this general pattern continuing. Unless any significant external factors occur it's highly likely that the run of rate cuts will continue, and with the prospect of a reduction in base rate now being predicted by some, there's little to suggest a reversal – which is why it's so important to get the best rates you can. Averages may be low but there are still some good deals out there, so check out our best buys and see if you can beat the rate cuts.

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.