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The outlook for interest rates and what it means for your savings

With the Bank of England set to decide on interest rates this week, we look at what a rate change could mean for you and your cash, and how to get your money working harder.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

There’s speculation the Bank of England (BoE) may cut interest rates at their meeting on Thursday.

This could cause a domino effect for your savings because there’s a link between the base rate set by the BoE and the rate banks and building societies offer savers.

The rumours have been fuelled in the past few weeks by comments from three members of the BoE rate setting committee.

The Governor, Mr Carney, said that interest rates could be cut if economic performance continues to be weak. And both Gertjan Vlieghe and Silvana Tenreyro have hinted that they could vote for a cut if data doesn’t show an improvement in the economy since December’s General Election.

At the last meeting, the group that sets interest rates voted 7-2 in favour of keeping rates at 0.75%, so only three votes need to swing to drive through a cut.

What do the investment experts think?

Before it was announced that inflation had fallen a couple of weeks ago, the markets were split on whether interest rates would be cut at this meeting, although they still expected one by March.

But after inflation fell to 1.3%, the markets are now more confident of a rate cut this week. This is because low interest rates tend to nudge inflation higher, which could help the BoE get closer to the government’s 2% target.

In our recent survey of investment fund managers, 50% think rates will be between 0.5% and 0.75% by the end of the year. A third think they could be between 0.25% and 0.5%. Just 10% expect us to end the year with higher rates than we have now.

What does this mean for your savings?

The rates that banks and building societies offer are partly based on their own predictions for UK base rates. So to some extent, the rates on offer may already take into account the prospect of a cut. But as the following table shows, the last time base rates were cut back in 2016, savings rates continued to fall in the months after.

Base rates vs average savings rates

Source: Bank of England

But as we’re not hearing any noises of base rates rising, the immediate future looks challenging for savers. In fact we’ve recently seen some big names cutting the interest rate on some accounts, including Santander who has announced a reduction on the rate offered through their 123 account from May.

But that’s no excuse to sit on your hands

With savings rates falling, the quickest way to boost your cash is to take stock of what you’re currently getting, what type of account it’s in and see if it’s competitive. This doesn’t have to be a tiresome task.

Most of the UK’s savings is sat in instant access accounts. But the average instant access savings rate pays just 0.41% including unconditional bonuses. You can currently get almost three times this amount on an easy access product through Active Savings.

On a savings pot of £35,000 that’s £277 more in interest in just one year.

Fix for the future

If you’re worried that rates may fall further in the future, now could be a good time to consider fixing your cash.

Financial planners usually suggest we keep three to six months’ worth of expenses in an easily accessible account, in case of emergencies and short term goals. But for anything over this, you could consider fixed term savings.

With fixed term savings your money usually won’t be accessible until the maturity date, but you’re likely to get a much better rate than instant access.

In fact, you don’t need to fix for long to earn better returns, just 6 months could give a noticeable improvement. Generally the longer you fix for, the better the rate.

An easy way to boost your cash

Active Savings makes it easy to get great returns on your savings. It lets you pick and mix easy access and fixed term savings products from a range of banking partners. And it’s all managed through the convenience of one online account, with one login.

There’s great rates to choose from, such as 1.20% (AER/Gross*) for easy access and 1.65% (AER/Gross*) on a 1-year fix. New products and rates are added frequently, and you can find some of the most competitive savings rates in the market. We can even alert you when a great rate becomes available.

Register for Active Savings Alerts

Plus, it’s easy to split your money across different products with different banking partners. It only takes a few clicks, so you can keep your money working hard.

So why not try Active Savings and boost your cash today? You can get started from as little as £1.

This article is not personal advice. If you’re unsure if a savings product is right for you, please seek advice. Inflation reduces the future spending power of money. Rates quoted are correct as at 27 January, and they may be added or withdrawn at any time.

Discover Active Savings

*AER (Annual Equivalent Rate) shows what the interest rate would be if interest was paid and compounded once each year. It helps you compare the interest rates on different savings products.

Gross means the interest rate without any tax deducted. Interest is paid gross. You are responsible for paying any tax due on interest that exceeds your Personal Savings Allowance to HM Revenue & Customs.

Expected profit rate – Islamic banks offer an expected profit rate, rather than interest on their savings products, in order to comply with Sharia banking principles.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248. The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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