Interest rates are dropping – is it time to fix your savings?
The Bank of England has begun cutting interest rates, and with concerns over a global trade war seeping into growth forecasts, it is likely that the rate cuts will continue.
Bank of England Governor Andrew Bailey has confirmed that interest rates are on a declining path, despite inflation stubbornly remaining above the central bank’s target of two per cent.
Rate setters face a tricky balancing act – but what does this mean for savers? Those storing cash away have benefited from the highest rates in years, but this might be quickly coming to an end.
With that in mind, should you be considering a fixed savings account?
What is a fixed savings account?
Fixed rate savings accounts come with a guaranteed interest rate over a set period. While this means you avoid the variable rates that affect easy access accounts, the trade-off is you’re not able to access your money before the term is due.
If you do need to take your money out, withdrawals will likely come with a penalty – you’ll probably end up losing the interest you would have otherwise gained.
You can fix your savings for a period ranging from six months to five years, with each duration being appropriate for different saving goals.
Should you fix your savings?
According to Moneyfactscompare, the top rates available on easy access accounts and fixed rate bonds have both fallen over the past couple of weeks.
Still, the most competitive fixed rate deal across all periods remains above 4.50 per cent.
“However, this is unlikely to last much longer,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “Average rates have moved very fractionally south over the past month, and if the market continues to expect more cuts, this is likely to continue.”
“We’re also expecting easy access rates to fall further than fixed rates… Anyone who opted for an easy access account for cash they won’t need for the next year or so might consider shifting into a fixed rate deal while rates are still so strong,” Coles added.
Markets are pricing in three to four more rate cuts from the Bank of England which will lead to more pain for savers. This increases the appeal of a fixed savings account, but there are some things to consider.
The main thing to think about is when you’ll need to access your money. Is the extra interest worth it if you’ll find yourself needing the cash sooner rather than later?
It’s probably unwise to set all your money aside for a long period of time. Currently, you can still benefit from some very competitive, easy-access rates. If you’re just starting to build your savings, you might be better off with one of those.
However, if you have a set amount of money you’re happy to lock away, and you like knowing exactly how much interest you’ll be getting on it, a fixed account might be for you.
Additionally, rates are definitely on a downward trajectory, so the risk of missing out on a better rate any time in the near future feels low.