Inflation slows, savings rise – a win for savers?

2024 ended with inflation at slightly higher than the Government’s target of 2%, although a little lower than expected, the latest figures from the Office for National Statistics (ONS) show.

In the 12 months to December 2024, the headline inflation rate as measured by the Consumer Prices Index (CPI) was 2.5% - slightly lower than 2.6% in November – and below the forecast which was for the rate to remain unchanged.

Possibly more importantly though, core inflation fell to 3.2% from 3.5% in December, and services inflation fell too, from 5% in November to 4.4% in December. These latter inflation measures are reviewed closely by the Bank of England when they consider interest rate decisions. And what these figures mean is that a base rate cut could well be on the cards at the next Monetary Policy Committee (MPC) base rate meeting on 6th February 2025.

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Michael Saunders, a former member of the Bank of England's MPC, told the BBC, "if it stays like this, we will be "en route" to slightly more interest rate cuts"

The key drivers of the unexpected fall in inflation in December were the slowing price rises of restaurants and hotels. The ONS reported “The annual inflation rate for restaurants and hotels was 3.4% in December 2024. This is down from 4.0% in November and is the lowest annual rate since July 2021. On a monthly basis, prices fell by 0.1%, compared with a rise of 0.5% a year ago.”

However, Rob Wood, the Chief UK Economist at Pantheon Macroeconomics said that “Both will reverse in January, so the dovish news today [15/01/2025] is a temporary reprieve.” He added that “inflation is still heading above 3% in April.”

So, the Bank of England policy makers are likely to remain cautious and it’ll be interesting to see what the January inflation figures look like, which will be announced ahead of the next MPC meeting.

We‘ll have to wait and see, but the good news for savers is that while we do so, there are other economic forces at play, that are causing fixed term bond and ISA rates to increase!

It’s been widely reported that UK gilt yields have been soaring, and this is a concern as the Government has to offer higher interest rates to attract investors to new bonds.  

Governments generally borrow money by selling bonds (known as gilts in the UK) to big investors, such as pension funds. The higher yields increase the cost of borrowing, potentially straining public finances, especially if the government has a large debt.

But on the plus side for savers, rising gilt yields is linked to rising fixed term savings rates, and that is what we have seen recently, especially on the best rates for longer term bonds and ISAs. Increasing savings rates and slowing inflation is a great combination for savers and means that there are many accounts available that are paying an interest rate that is higher than the current level of inflation, even if you now pay tax on your savings interest.

Take advantage while you can

At the beginning of this year, the top 5-year bond was paying 4.50%, but at the time of writing, this has leapt to 4.78% - and even more interestingly, this rate is higher than the top 1-year bond, which is currently 4.77%.

It’s been quite some time since you could earn more when locking your cash up for longer – so it’s a good opportunity to get a top rate that should provide an inflation beating return over the next few years, even though interest rates are expected to continue to fall, although more slowly and to less of a degree than previously expected.

Rates on the top fixed term cash ISAs have increased too this year, but the longer term are still paying less than the short-term accounts. The average of the top five 1-year ISAs is now 4.53% up from 4.50% at the beginning of the month, although the best rate is only 0.01% higher at 4.54%, up from 4.53% on 2nd January.  The top 5-year ISA is now paying 4.21%, up from 4.18%. Regardless of how small, increases are welcome, nevertheless.

But things may already be settling down.

The yield on the 10-year gilt - the interest rate at which the government pays back a decade-long loan to investors – dropped to 4.72% on Wednesday, having risen to nearly 4.9% on Monday, its highest level for 17 years.

Meanwhile, by Wednesday, the 30-year gilt yield stood at 5.30%, below Monday's peak of 5.46%.*  

As a result, if you are thinking of locking up some of your cash, you might want to strike while the iron is hot, as we don’t know when things may reverse.

Take a look at our Best Buy tables to find the right account to pay you the most interest.

Check if your savings are keeping ahead of inflation with our inflation calculator below:

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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.

The Financial Conduct Authority (FCA) does not regulate cash advice.

The accounts and rates mentioned in this article are accurate and correct as of 16/01/2025.

* Source: FT & MarketWatch