UK interest rates set to peak

Fill your boots!

Although we’ve been saying it for a while, earlier this month the Governor of the Bank of England, Andrew Bailey, told MPs at a Treasury Committee meeting that rates were ’much nearer the top of the cycle’ following last month’s base rate hike, the 14th in a row, to 5.25%. He said that while previously there had been a time when ‘it was clear that rates needed to rise’ he went on to say that ‘we are not, I think, in that phase any more’. This comment came alongside his reiteration that he believes inflation is likely to fall significantly this winter.

And low and behold, at the latest meeting on 21 September, the Monetary Policy Committee (MPC) voted to keep the base rate level this time around – although it was a close thing, with the vote to pause the rate hikes being 5-4.

One of the key factors for this decision was better than expected inflation figures for the 12 months to August 2023. Economists were expecting that the Consumer Prices Index (CPI) in August would be up slightly from 6.80% in July, to over 7% once again, due to sticky wage inflation and an increase in petrol prices. But the Office for National Statistics (ONS) data confounded the experts, as the rate at which prices are rising actually slowed a little – down to 6.70%.

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The expectation that the base rate will reach a peak of 6% has receded and in fact what we must now wait to find out is whether the peak of the interest rate cycle has come earlier and lower than previously expected, or whether this is a pause ahead of perhaps one or two further hikes.

 This of course will be good news for mortgage holders, many of whom still have fixed rate deals that are yet to come to an end, but for savers it could mean that now is the time to lock into some of the excellent rates that are currently available, before the base rate peaks and then potentially starts to fall once again.

Best buy rates have risen to extraordinary levels recently, with easy access accounts offering more than 5% and NS&I has triggered a small battle between certain providers after launching the latest issue of its 1-year Guaranteed Growth Bond paying 6.20%. At the time that bond was launched, the top accounts it leapfrogged were all paying 6% but the other best buy rates have been creeping up a little in response.

But with the market now potentially peaking, the competition that we have seen could soon start to wane once more.

Don’t put all your eggs in one basket

It’s not just the short-term bonds that savers could be considering. Although Andrew Baily stated that he believes interest rates will remain flat for some time after they peak, with the top savings rates on longer term bonds paying a little less than the shorter term, it’s a clear indication that rates are likely to start to fall again in the next few years, although no-one expects things to become as dire as they were a couple of years ago. So those who opt to lock some of their cash away for the longer term might find themselves earning more in the long run – and if inflation does fall to closer to the 2% target, importantly your cash savings could be earning more than inflation.

The best 3-year bond is currently paying 5.96% with Hampshire Trust Bank, while the top 5-year bond is 5.85% with Tandem, either directly or via the Raisin UK cash platform.

With the money you might need access to, the easy access market has also been boosted by the recent although short-lived Easy Access Limited Edition account from Santander paying 5.20%. Although this has now been withdrawn, there are plenty of accounts that are paying 5% or even a little more. The top paying account is the Leeds Building Society Limited Issue Online Access Account (Issue 50) paying 5.10% AER. 

As this illustrates, there are plenty of accounts to choose from that will now pay some meaningful interest and it probably makes sense not to put everything into just one type or term of account, if you don’t need immediate access to the lot. But you need to shop around. Why not sign up for Savings Champion’s free Rate Alerts and Best Buy tables delivery service, to keep yourself up to date with the top rates on offer.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA). 

The accounts and rates mentioned in this article are accurate and correct as the time of writing 22/09/2023.