Paragon Bank Savings Director Derek Sprawling discusses the trend towards fixed-rate savings accounts and asks where will rates head next in his latest column. This comment was originally featured in The Money Pages.

The recent ISA season has been one of the strongest on record and much of the money that has flowed into cash ISAs has been directed towards fixed-term variants.

Savers have responded strongly to rising fixed-term rates and have been shifting their money from instant access or current accounts. Since the first working day of the year, up until 9 April, CACI weekly data shows that a net £39.6 billion has flowed into fixed-term accounts, with a net £29.5 billion exiting instant access variants.

As providers have competed for position at the top of the best buy tables, savers have locked in some of the best rates available for over a decade.

Moneyfacts data shows the average longer-term fixed-rate bond stood at 3.86% at the end of March, compared to 0.65% in March 2021, with the ISA equivalent at 3.72% against 0.59%. The rates on the best buy tables have been significantly higher than that.

Peak level

Until the past two weeks, it was widely expected that fixed-term savings rates were at – or near the – peak level. However, a week is a long time in the savings market and above-expected inflation numbers may prolong the high fixed-term rates we have recently seen.

Fixed rates are heavily influenced by the swap rate. These are essentially a forecast of where the Bank of England’s (BoE) Base Rate will be at the end of a given period.

With the economic outlook brightening, Swaps were heading down as markets forecast a lower future Base Rate.

However, the most recent economic data, including inflation stubbornly remaining above 10%, has prompted Swaps to rise again slightly as the markets now expect the BoE to keep Base Rate higher for longer.   

After last September’s infamous mini-budget, swap rates surged as the financial markets forecast central banks would need to increase rates steeply to curb out-of-control inflation.

Swap rate

At the time of writing, the UK five-year Swap Rate currently stands at 4.05%. Although this is well down from the 5%+ rates experienced in the fall out of the mini-budget, it has risen over the past two weeks.  

On this basis, I would expect fixed-term rates to rise a little further or plateaux for longer than originally expected before slowly starting to fall back.

We are also likely to see some upwards movement in the variable rate market as the likelihood of rates coming down in the next six months falls. As the markets now expect one or maybe two more increases, we could see some upwards pressure in this segment of the market.

However, as with anything in the financial markets, it’s difficult to predict with certainty because there are so many factors that can impact rates. Who could have forecast the outbreak of the Covid pandemic, for example?

Visit our Savings  webpage to view our range of rates.