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The Risk of Waiting for Base Rate Rises

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In his latest market update Derek Sprawling, Paragon Bank's Savings Director, discusses what savers should be mindful of whilst holding out for interest rates rises.

As savers wait to see the impact of the incoming government’s energy policies, and what changes the anticipated autumn financial statement by the new Chancellor of the Exchequer may bring, eyes are once again also turning to the Bank of England’s Monetary Policy Committee.

The Committee seems certain to continue its trend of Base Rate rises, and now with growing speculation that rates could increase by as much as 0.75% - though a rise of 0.50% is still more widely anticipated.    

Irrespective of the rate of increase, expectations remain that the Bank is on a course of rises that will reach to a Base Rate of 4.0% in the second quarter of 2023.

This presents savers with the challenge of balancing which is the right savings products for them with when is the best time to do so and secure the best rate.

Given the rate rises already recorded in 2022, it is understandable that many savers will take, what may initially seem, a cautious approach and delay making the decision in case the Base Rate increases further throughout 2023.

I can understand the thinking behind this decision. If you have seen the base rate grow from 0.5% to 4.0% in a year, then it is not much of a leap of imagination to envisage rates of 4.5% and above.

Savers wishing to make their money, and an interest rate increase, do the most it can for them at a time of high-inflation is an entirely reasonable position – but there must be caution, as rates will not continue to rise exponentially, and the Base Rate may peak sooner than some expect. 

As such, rather than waiting for a rate that may never appear, they could instead be missing six months of rates close to the eventual peak.

This challenge is further heightened for savers, after many years of little to no changes to low Base Rates, by seeing sudden increases from high street banks.

But there is often also a pronounced variance in the interest rates offered on the high street compared to challenger banks, such as Paragon.

For instance, it is not unknown to see 2-year fixed savings accounts that may only offer around 1.60% AER from high street providers.  

These rates are though in marked contrast to challengers, which can often provide a far greater return for savers – with 2-year fixed rates on savings of over 3% AER available today.

While it takes time to find the right products to fit an individual’s circumstances, the benefits of doing so are apparent – and when savers need to be making their money work to help pay for the essentials in the years ahead, and not just life’s little extras, I urge everyone in a position to do so.

Earlier this year I wrote of how some financial commentators had begun to caution against ISAs, and as the year has progressed events have shown how this caution, though well intentioned, was misplaced.

ISAs remain an excellent way of building a savings pot, particularly for higher-rate taxpayers or those with significant savings in non-ISA accounts who may be incurring interest beyond their Personal Savings Allowance.

The task then for savers now looking ahead to 2023 and beyond is find the right products for their circumstances, to not limit the range of products and providers they consider, and to make the best decision for them at the right time.

This is not the most exciting thing on anyone’s to-do list – but one which you may end up regretting if you hold out for rates that are not likely to transpire.

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