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It's now been 11 months since the Bank of England cut the base rate to 0.25%, and many savers will have felt the impact, with average interest rates on an almost continual downward spiral since then. However, there have been some signs of life recently, with challenger banks competing particularly heavily.
These banks still need savers' funds – unlike the rest of the savings market – and so have long been the saviours of the sector. Happily, they're continuing to make their presence felt, and have been raising rates considerably on their one-year fixed rate bonds.
As a result, our latest research shows that the average one-year fixed bond rate has now hit 1.11%, the highest recorded rate since 4 August 2016, when base rate was cut to its historic low of 0.25%. The average may still be lower than at this time last year, as the table below shows, but there are some definite improvements, with the top-paying fixed rate bond now paying far more than it did a year ago.
|Average one-year fixed rate bond (gross)||2.57%||1.20%||1.10%||1.11%|
|Highest one-year fixed rate bond (gross)||3.60%||1.79%||1.60%||2.00%|
After all, savers would have needed to invest in a two-year fixed rate bond to earn 2% in July 2016, but today they have the option to pick a one-year fixed bond paying the same return, with a choice between Al Rayan Ban and Bank of London and The Middle East, both of whom offer an expected profit rate of 2.00% (gross).
These two providers have greatly improved their bonds in recent months, too: they were paying 1.50% at this time last year, when the best one-year bond (from Charter Savings Bank) paid 1.79%, so the market is clearly on the up.
Things have improved particularly strongly in the last month – additional figures show that the average one-year bond rate stood at just 1.06% in June, while the top-paying deal boasted a rate of 1.60% (again from Al Rayan Bank), so the recent improvements have certainly been dramatic.
"The savings market has without a doubt been dampened by the base rate cut, but this hasn't stopped challenger banks from reviewing their range this year and boosting rates to entice new investors," said Rachel Springall, finance expert at moneyfacts.co.uk.
"There is evidence of larger numbers of deals improving too, not just the Best Buys, even if only by slight amounts. So far in 2017 we have seen 114 rate rises on one-year fixed bonds, whereas for the entire year of 2016 there were only 44 rises recorded in total. This shows how much more competition there has been in this area of the market."
Clearly there's still much more room for improvement – five years ago the average one-year fixed bond was more than double today's average, at 2.57% compared with 1.11%, equating to a £146 loss of interest on a £10,000 one-year investment.
Nevertheless, rates are improving overall on shorter-term savings, as even some easy access accounts can pay 1.11%. It's worth pointing out that these low returns will still be eaten up by rising inflation, not to mention that the easy access accounts with the biggest returns tend to carry a large bonus which disappears after a year, but it's still a step in the right direction.
"Overall, this is a positive halfway point in the year for savers, especially if they want to avoid piling their cash into a longer-term fixed account," concluded Rachel. "Rates are improving and savers will have the opportunity to get a 2% return on a one-year bond for what was previously a two-year commitment."
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