Bank of England base rate increase – is it good news for savers?

December 2021 saw the first increase to the Bank of England base rate in over three years, when it rose from its historically low level of 0.1% to 0.25%. Any change to this rate is important as it can often influence what borrowers pay and how much savers earn.

Whilst undoubtedly an important development, it is fair to say that it was not surprising. Prices had been rising sharply in recent times, pushing the rate of inflation above 5%, and increasing interest rates to dampen demand somewhat is one tool at the Bank of England’s disposal.

Assuming inflation persists, it is likely that further increases to the base rate will be on the cards in the future. Predicting when these might occur is difficult, but I think it is a fairly safe assumption that there will be at least one more rate rise in 2022.

This is an important consideration for borrowers, particularly those accustomed to low interest rate products that can vary, which may add to a ‘squeeze’ on household spending for the foreseeable future. On the other hand, would it be right to assume that the higher interest rates will be passed on to savers, therefore starting to see an end to the years of very low returns on cash products? Not necessarily.

Whilst banks and building societies were quick to pass on the higher interest rates on their mortgage products (many of which are linked to the base rate), a significant number have not done the same with their range of savings accounts. Of course, it would be unfair to tar all banks or building societies with the same brush, but this does tend to be a theme whenever there are amendments to the Bank of England’s base rate.

The best ‘easy access’ savings account is currently 0.70%, and the returns offered on similar products is actually significantly less than this with the so-called ‘well known’ banks and building societies. If you can tie your funds up for three years or more the best rate at present is 1.85% (Source: Money Saving Expert January 2022).

There is no denying that these rates are somewhat better than those available last year, so in that sense any improvement is reason to be more cheerful. But this cheer is dampened somewhat when taken in the context of the rise in the cost of living we have all seen, evidenced in the inflation rate exceeding 5%. There is scope for inflation to rise still further this year, adding weight to the argument that more interest rate rises may be required in order to combat this.

So, is it good news for savers? In one sense, yes – rates are creeping up higher with some institutions now, albeit at a slow pace. However, whilst returns on cash savings remain significantly below inflation – which is likely for the foreseeable future – the ‘buying power’ of your money is likely to be impacted by investing in cash. The longer this persists for, the more it can be an issue in the future when you come to rely on the funds.

So for those who are looking to make a ‘real return’ on their hard-earned money, it would still be prudent to consider alternatives to traditional cash savings whilst the current low interest rate environment persists.
Savings accounts still have their uses, especially for money that you’ll need to get your hands on soon. But if you’re planning to put money aside for the medium to long term, it is still very much the case that it might be better to invest.

If you would like to discuss investment strategies or any other financial planning matter, please do not hesitate to contact us on 0114 2588899 or email Our Independent Financial Advisers are qualified to provide advice in the areas of retirement planning, tax planning, savings, inheritance tax, investments and protection.

Please remember that the value of investments may fall as well as rise in value.

Leave a Reply

Your email address will not be published. Required fields are marked *