It has been two years since the Bank of England raised the base rate to 0.50% from its historic low of 0.25%. But, despite that boost and the subsequent increase in August 2018 to 0.75%, average long-term deposit rates have now fallen to their lowest point since November 2017.
Fixed term rates in decline
Research from Moneyfacts.co.uk shows that fixed term deposit rates have been in decline over the last 12 months, so consumers could therefore be losing out if they simply re-invest their term deposits (or allow them to roll over) with the same provider at maturity.
As rates decline, deposits held in accounts paying less than the current rate of inflation are effectively losing value in real terms.
The decline in interest rates is a reaction to the uncertain economic outlook. As Brexit continues to cast a shadow over the economy, some banks are reducing savings rates in anticipation of a base rate cut, and this downward trend shows no sign of slowing down.
Inflation is falling, providing a window of opportunity
More encouragingly however, inflation is now at a three-year low, providing an opportunity for consumers to earn more interest in real terms. The latest Office of National Statistics figures show that inflation has fallen from 2.10% in July to 1.70% in August and September, and 1.50% in October. Furthermore, the Bank of England in its latest Monetary Policy Report predicts that by mid-2020 inflation could fall to 1.20% or even 1.00%.
Any account therefore paying in excess of 1.50% is currently outstripping inflation and for savers this means that there are more accounts in the market which now deliver inflation-beating returns. Consumers and businesses may also be pleasantly surprised to find that the length of time that they need to tie up their money for, to achieve returns in excess of 1.50%, is less than they expect.
However, this window of opportunity may be closing. Inflation dipping further than expected last month increases the likelihood that the Bank of England will indeed reduce the base rate in the coming months if the economy does not pick up.
In last week’s meeting of the Bank of England’s Monetary Policy Committee (MPC), two of its members voted for a reduction, indicating that opinion is moving towards lowering the current 0.75% rate in the coming months, consolidating downward pressure on market deposit interest rates.
The time to act is now
In light of the economic outlook, the time for savers and company finance directors to act is now.
Consumers, businesses and charities can secure a fixed term market-leading rate to protect their deposits from a continued decline in interest rates and the impact of the Bank of England’s next move.
Locking in a fixed term inflation-beating rate now means that the deposit won’t be affected by any falls in market rates over the account’s term and gives peace of mind that the value of the deposit isn’t being eroded by sitting in a suboptimal account. Moreover, choosing an account which pays more than 1.50%, if inflation continues to evolve as forecast, means that the growth with be increasing in real terms.
Securing the current leading rates in a declining market however requires a proactive approach.
How to secure best-in-market rates
To protect your cash from inflation you can secure a fixed term deposit rate which will typically deliver a much better return than an easy access account, and you may be surprised to find that you don’t need to lock your money away for long to get a better deal. It’s possible to achieve an inflation-beating rate by tying your money up for as little as six months.
Typically, the longer you fix for, the better the rate, so although the flexibility of easy access accounts can be attractive, the option to ‘ladder’ deposits across a series of accounts with different term lengths, and to hold a proportion of your deposits in short-term notice accounts or easy access accounts, could be a good option.
Ensure peace of mind with Flagstone
Spreading your money across multiple accounts may sound like a lot of hassle, however with Flagstone it couldn’t be easier. Flagstone is an online cash deposit platform that requires one single application to access over hundreds of deposit rates from 38 banks and building societies.
Market-leading and exclusive deposit rates currently available on the platform include a*:
- 12 month fixed term deposit account paying 1.95% AER,
- 6 month fixed term deposit account paying 1.65% AER,
- 3 month notice account paying 1.80% AER,
- Instant Access deposit account paying 1.50% AER,
AER (Annual Equivalent Rate): illustrates what the interest rate would be if interest was paid and compounded once each year.
By securing these market-leading rates now, savers can protect their deposits from falling interest rates in the short-term and increasing inflation in the longer-term.
*Correct as at 19th November 2019.