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Why easy-access rates may rise but fixed bonds won't

Tax thresholds: Rising interest rates mean income from savings accounts could soar by several hundred pounds this year.

Investors are warned that fixed rate bonds have likely peaked. This comes on the back of growing uncertainty over whether the Bank of England will push the base rate higher to fight inflation.

Experts say savers should no longer wait for the best fixed rate deals to rise from their current level of 4%.

However, there is still more wiggle room planned for easy access accounts to head to the top.

Experts say savers should no longer wait for the best fixed rate deals to rise from their current level of 4%

Experts say savers should no longer wait for the best fixed rate deals to rise from their current level of 4%

The Bank of England’s base rate has been rising since the end of 2021, from an all-time low of 0.1% to 4% currently.

But last week Andrew Bailey, the Bank’s governor, quashed the idea that they would continue to climb.

He said: “At this point, I would caution against suggesting that we are done with raising the bank rate or that we will inevitably have to do more.”

A further increase in the discount rate may prove appropriate, but nothing is decided.

There is a lot of uncertainty with the risk that inflation will remain stubbornly high. Currently, it is expected to fall sharply later this year from its current level of 10.1% and reach its target of 2% early next year.

If it follows its predicted course, we will likely be near the top of the savings rate increase cycle, experts say.

Kevin Mountford, co-founder of savings platform Raisin, said: “The Bank of England needs to bring inflation down, which means raising rates and, at the same time, avoid recession, which means not not increase them.

“If the base rate goes up, there’s more wiggle room on variable rate accounts than on fixed rates.”

This is because fixed rate bonds and variable rate accounts are priced differently.

Fixed rate bonds reflect what wholesale money market traders think will happen to rates here. They have been rising over the past few weeks – but that may be short-lived following recent comments from the governor.

Variable rate accounts, however, are priced on the base rate – and we could see an interest rate hike later this month when the Bank of England makes its decision on March 23.

Anna Bowes of Savings Champion said: “Andrew Bailey’s comments underscore the possibility that we are near the top of the interest rate hike cycle. However, there could still be one or two more hikes in the base rate, which should mean more hikes for variable rate accounts.

A spokesperson for The Savings Guru website said: ‘Fixed rates are at their peak and are expected to fall back over the course of the year.

“But there is still room for easy access rates to reach 3.5% if the base rate reaches 4.25%.”

Even if the base rate does not increase, banks still have the option of paying more on their variable accounts.

Indeed, competition has returned to the savings market and providers have not raised rates as much as the Bank of England is raising.

Banks and building societies make money by paying savers less than they charge borrowers.

Not all money providers can lend can be deposited with the Bank of England and earn 4%, far more than they pay savers.

Last week, easy-to-access accounts broke the 3% mark. The best easy access rate comes from Zopa at 3.21%.

Tandem pays 3.2%, including a 0.35 percentage point premium for the first year, with an underlying rate of 2.85%. Shawbrook rose to 3.06 and Ford Money hit the 3% mark.

Coventry BS launched its limited access online saver and Paragon its triple access saver, both at 3.1%. Both accounts limit the number of withdrawals you make each year to six and three respectively.

The main one-year fixed rate bonds come from Atom at 4.3%. Halifax has a new 4% one-year bond, while National Savings & Investments is paying the same rate on its one-year guaranteed growth bond. Coventry BS pays 4.1% for one year and 4.35% for two years.

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