The Bank of England has this week bumped up its base rate by 0.75% to 3%, the largest such hike since 1989. The rationale is that it must try and control inflation. In practice, some argue this is a somewhat moot point; price rises have mostly been driven by post Brexit/Covid supply issues and the war in Ukraine, factors which central banks are rather powerless to remedy. But anyway…
Whilst bad news if you have variable rate mortgage, or a fixed rate coming to an end, savers can now earn worthwhile interest for the first time in years. There are fixed rate accounts between one and five years paying near 5% a year, whilst 2.5% is now achievable via some easy access accounts. Of course, with annual inflation still running over 10% you’ll still be losing money in real terms, even on such ‘best buy’ accounts, but less versus a few weeks ago.
If you have savings, now would be an opportune time to check you’re getting a good deal. Lose interest and you’ll probably be losing interest, most banks and building societies continue to pay paltry/zero interest on older accounts. Fully benefitting from the recent rises will likely mean switching. Yes, it’s a hassle, but relatively straightforward since most account applications are online these days. And since every 1% interest is worth £100 a year per £10,000 of savings, it’s likely to be a worth some of your time.
The Bank of England predicts that inflation will start to fall sharply from the middle of next year, as energy and imported goods price rises likely slow and the soaring prices experienced to date start to fall outside the one-year inflation calculation period. Markets are expecting the base rate to rise to around 5% later next year, before drifting back nearer 4% over the following couple of years.
With interest rates on the up and stock markets volatile, is cash now the better bet? We don’t think so, provided you’re investing for 5-10 years or more. Cash savings tend to lag inflation long term, whilst stock markets tend to beat it. The key caveat is that stock markets do not move in a straight line, it’s a bumpy journey that requires a strong nerve at times and patience. That’s why we always recommend retaining ample ‘rainy day’ savings when investing, to minimise the likelihood of having to dip into investments at what might be an inopportune time.