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Those who remember the 'good old days' of (much more) impressive savings rates and interest firmly above inflation may not be too impressed to hear that the average long-term fixed bond rate has risen by 0.05% to 1.30% this month, but it is the first time such a significant rate rise has occurred since October 2015, so that's at least worth a small celebration.
The figures, taken from our latest UK Savings Trends report, which is due to be published tomorrow, show that the long-term fixed rate (excluding ISAs) has fallen by a whopping 0.73% since February 2016, from an average of 2.03% to 1.30%, as competition in the market steadily reduced throughout last year. Even around the time of the base rate cut in August the long-term average had already decreased to 1.56%, showing that savings providers have been reluctant to make themselves attractive to savers for some time now.
So where did this latest increase come from? The big banks remain reluctant, thanks in part to the continuation of the term funding scheme, so it's down to the challenger banks to compete for the top of the Best Buys. Charlotte Nelson, finance expert at Moneyfacts, explains: "The increased presence of challenger banks has been driving the boost in the average rate, with rate increases and launches outweighing cuts for the first time in 15 months.
"These banks are still relative newcomers and so with no brand name as such to trade off the best way to get savers' attention is to offer the best rates. These banks need to continue to remain competitive, as when a tranche of bonds matures, they do not want a substantial majority of their savings book to go elsewhere."
And indeed, if you've been keeping an eye on the savings Best Buys of late, you will have noticed that there is more movement than there has been for months, with providers not only improving rates and launching new products to get to the top of the charts, but others also reacting by bumping up their own rates to match or excel. But why is this happening now?
"With many savers waiting for the NS&I three-year fixed bond, expected to be announced in the spring, many of these providers know that they will likely be unable to compete with the predicted rate of 2.20%. Instead, they are choosing to attract customers now to pre-empt this," Charlotte says.
This behaviour is causing a micro-market to form, with the main banks being left in the dust by the challengers eager to sign up more savers and keep the ones they already have. And given that the UK challenger banks should all be covered by the Financial Services Compensation Scheme, with similar safeguards in place for their foreign counterparts, there's no harm in looking at the Best Buy charts to see if a challenger has a rate worthy of your investment.
As Charlotte points out: "Whilst this [rate increase] is positive news, savers are still battling rising inflation, so they will have to remain vigilant to get the best possible return on their savings." With no indication of whether or not these rate rises will continue, if you come across a decent rate in the savings charts, it's still a good policy to sign on sooner rather than later, before it has a chance to disappear again.
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