What a rate rise next week will mean for your savings – and for the ISA season
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, discusses what a rate rise next week will mean for your savings – and what it means for the ISA season.
Key points:
- The bad news is that a rate rise has already been priced into the savings market, so we won’t see any big bumps.
- Banks are broadly expecting a 0.25 percentage point rise, with another 0.25 pp rise in May – taking us to 1%.
- However, any rises higher than this would feed through into savings rates.
- And Marcus’s bump in the easy access cash market (from 0.6% to 0.7% including the bonus) will push more rates up.
Sarah Coles says:
“Dismal clouds of disappointment are likely to descend on savers again next week, because if we get the rate rise the market is expecting, we’ll see very little reaction from the most competitive savings accounts. Fortunately, there is a bright spot of hope for the cash ISA season, because a new savings rate launched this week could cause a flurry of activity.
“A rate rise next week will bring little relief for savers, because the rise is already baked in, and if the bank raises rates as expected over the next few months, we’re expecting a slow, gradual grind up to 1% in the easy access market.
“Savers have every right to feel disappointed, because savings rates have barely budged since the Bank of England started raising interest rates. In October last year when the Bank of England base rate was at 0.1%, the best easy access rate was at 0.66%. Since then, the base rate has risen 0.4 percentage points and the best easy access savings rate a disappointing 0.14 percentage points (excluding those limited to specific customers).”
Why rates are low:
“Over the past two years, savers have been moving their cash back to the big high street banks. In an uncertain world, they’ve felt more comfortable with brands they have known for life than newer banks available online. It’s easy to understand why people are seeking the comfort of the familiar, but it’s not necessary, because newer banks offer all the same protections as the established brands if something was to go wrong.
“With so much cash washing around in the big high street banks, they don’t need to offer decent savings rates, and can stick with cheap mortgage deals. They’re essentially operating as if rates haven’t really risen. It means smaller and newer banks struggle to compete on the mortgage front, so in turn they don’t need more money from savers to finance more mortgages, so they’re not in a rush to raise savings rates either.”
The hope factor for savers:
“There is, however, one possible scenario which would bring a smile to savers’ faces. If we get a rise of more than 0.25 percentage points next week, it’s game on. Banks will bump up rates accordingly, and we should see a flurry of activity.
“There has also been a big move in the savings market this week which will have knock-on implications, because Marcus bumped the rate on both its easy access savings account and cash ISA from 0.6% to 0.7%.
“The impact on the cash ISA market is likely to be most striking, because Marcus is now top of the table – for accounts without restrictions. A big move from a player with such a big appetite for new cash will put pressure on all those offering just below 0.7%. We’re likely to see a flurry of rate rises in the easy access cash ISA market, just in time for the ISA season.
“In the savings account market, this will put similar pressure on all those offering just under 0.7%, but because this isn’t a market-leading rate, it will have less impact on the most competitive offerings.”
Kindly shared by Hargreaves Lansdown
Main photo courtesy of Pixabay
