Savers may have to move quickly to snap up the best fixed-rate deals, currently paying as much as 7 per cent, to protect themselves against falling cash returns in the wake of Thursday’s base rate cut to 5.5 per cent.
Locking in to current high bond rates will also insulate savers if, as expected, base rates come down further next year.
Just as instant access accounts face being pared back after this week’s rate reduction, so available fixed rates may not remain as attractive for long.
Most banks and building societies have yet to indicate by how much they will bring down deposit rates. Andrew Hagger of Moneyfacts, the rate service, said that the credit squeeze meant the base rate fallout for savers was a “$64m question”.
Recent months have seen lenders improve top savings deals by up to 0.5 percentage points to attract deposits as money market borrowing has become more difficult.
As well as fixed rates of up to 7 per cent, instant access deals have been lifted to as high as 6.6 per cent.
Hagger said: “The question now is what their number one priority is: are banks and societies happy to forgo margin to [continue to] secure [savers] funds?”
While some rates may remain buoyant, David Black, principal banking consultant at Defaqto, the personal finance analysts, expected most accounts to come down by the full quarter point, with cuts typically taking effect after Christmas. Some experts suggested that older “back book” accounts could face the biggest reductions.
But Black reckoned that savers looking for new top deals in January could still benefit from banks’ credit market difficulties. “Those looking for new products are still likely to be better off than when rates were last 5.5 per cent,” he said.
However, Kevin Mountford, head of savings at Moneysupermarket, the rate comparison service, said locking in to “artificially inflated” fixed rates might well make sense currently when “everything leans towards savings rates coming down”.
Abbey this week launched a bond paying 7 per cent with a one-year term. The bank said the deal, which is only for balances of £50,000 or more, would remain available until December 31.
Moneyfacts also highlighted shorter-term fixes paying up to 6.91 per cent. Bonds with terms of six months from National Counties Building Society and three months from Birmingham Midshires were “an excellent opportunity for savers to bag themselves an outstanding deal”, it said.
As well as offering certainty for savers, high rates plus the ability to access funds in just a few months could be attractive for investors looking to sit out present stock market turmoil. Mountford suggested splitting funds between a fixed-rate bond and an instant access account to balance a higher rate with flexibility.
Mortgage borrowers may learn sooner than savers how they are set to fare from the Bank of England’s first base rate cut in more than two years. Two of the biggest lenders, including Halifax and Nationwide surprised mortgage brokers by quickly announcing quarter point cuts in their standard variable mortgage rates. Others are now under pressure to follow.
Black said: “My suspicion is that lenders will want to be nicer to mortgage borrowers than savers currently.”
But not all borrowers are expected to see the full benefit of the base rate cut, though. Brokers said lenders could try to claw back profit margin by reducing variable rates by less than the quarter point base rate cut, or by keeping fixed rates at or close to current levels.
