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How Bank Base Rate influences saving rates 

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Paragon Bank Savings Director, Derek Sprawling, explains how waiting for future Bank of England interest rate increases to secure better savings rates could be a mistake.

As the Bank of England (BoE) grapples with soaring inflation, many savers will expect future Bank Base Rate (BBR) increases to curb spending and bring the cost-of-living crisis under control.

So far, the BoE has increased the BBR from 0.10% to 0.75% in a relatively short period of time and economists are forecasting future rate increases throughout 2022 and beyond. Naturally, most savers analysing inflation and the BBR might expect savings rates to automatically follow and increase across the market.

Many savers may decide to wait before committing to a savings product, particularly in the fixed rate term deposits market. Why commit your money to a rate for two, three or five years today when you could secure a better rate if you wait for the next BBR rise?

It’s a natural assumption, but a key factor to remember is that today’s BBR doesn’t necessarily determine the rates savers will be offered in the fixed term market.

Priced in

When savings providers price their term rates, they already factor in future movements in BBR, so these are essentially ‘priced in’ to the current rates on offer.

For example, today the market consensus is that BBR will increase for the next two years, plateau for a year and then fall. Should this scenario occur, all else being equal, we’d expect fixed-rate pricing to fall from the plateau position.

Therefore, savers waiting for better fixed rates through future BBR increases may be disappointed as these rates could actually be lower than today’s offerings, depending on the market forecast rate trajectory. Fixed term products such as bonds and ISAs are useful as part of a portfolio of savings as they provide assurance of return that accessible savings cannot.

The access market is exposed to the influence of the current BBR, but, again, it’s important to remember that rates in this segment are determined by a range of factors, not just the BBR. For example, competition and the corporate strategy of the savings providers can be a major influencer of pricing in the access segment.  

The High Street banks have edged their easy access pricing up a little, but not significantly. The major banks are cash rich and benefit from consumer apathy. Data from CACI, which collates information from over 30 savings providers, shows over two thirds of UK savings balances sit in low rate accounts belonging to the holder’s current account provider; those banks simply don’t need to increase rates to raise deposits.

Mid-tier 

In the mid-tier and specialist bank sector, things have been more interesting. Access rates have been increasing but the rate offered will differ from provider to provider, determined by that provider’s specific financial position, growth ambitions and corporate strategy. For example, a bank looking to float on the stock market may wish to build lending volume and therefore will increase rates to fund that activity.

We have also seen some providers looking to increase their current account customer numbers and have offered market-leading access rates if the customer takes out the linked current account.

For savers, the BBR is an important factor to consider, but the theory that any increase in BBR will automatically translate into savings rates – both across access and fixed term products - will not always hold true.

Derek Sprawling 
Savings Director
Paragon Bank

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*AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded on an annual basis.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551