Bank of England increases interest rates by 0.25 percentage points – how to make more of your savings

The BoE has once again increased interest rates by 0.25% to 4.25%. The second interest rate rise this year.

This rise was on the cards ever since the surprise rise in inflation announced yesterday. Given how sticky inflation is proving, it might not be the last of the rate rises either.

This could be good news for instant access savers. They’ve seen rates creep up over the months, and at a time of rising rates, we can expect more of the same. It means there could well be some attractive rates worth switching for in the coming weeks.

For fixed rate savers, the picture looks more mixed. Banks that had been pricing in a rate freeze for the month might boost their offering slightly, so there could be some opportunities worth looking out for.

However, further ahead, we’re expecting interest rates to drop once inflation falls, and fixed rates are increasingly being priced to reflect this. It means it might not be worth hanging around in the hope of higher fixed rates in future – especially if your cash is languishing in a high street account paying next to nothing in the interim. This article isn't personal advice. If you're not sure what's right for your circumstances, seek advice.

So, what can you do to make more of your savings?

1. Look further than your high-street bank

Well-known banks often pay the lowest rates.

Some of the large high-street banks currently only offer 0.65% on their instant access accounts. That's just £65 interest on a £10,000 savings pot after a whole year.

Truth is, the big names don't need to work as hard for your money. But smaller banks and building societies do, and they'll offer an attractive rate to get it.

You can currently get nearly four times more from our banking partners through the Active Savings service compared to the instant access 0.65% rate mentioned above. Active Savings offers easy-access products and withdrawals usually take one working day. Comparison with average market rates is based on instant-access products which allow immediate withdrawals.

Saving with your high-street bank is often the first port of call as they're familiar and you trust them. But all UK banks, regardless of how big they are, are covered by the Financial Services Compensation Scheme (FSCS) if they're authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and PRA. Your eligible deposits will be protected up to £85,000 per person.

This limit applies to all eligible deposits you have under each banking licence. So, if you have more than £85,000 in cash with different banking brands under the same licence, it could be sensible moving your savings elsewhere, to maximise your protection under the FSCS.

Are your savings safe?

2. Use fixed terms

There may be a preference to hold savings in instant or easy-access accounts. Given how uncertain things are at the moment, that's no surprise. But you might not need all your money in the same pot, and it could be holding back your returns.

You should keep at least three to six months' worth of essential expenses in an easily-accessible account for any emergencies. If you're retired, that should be around one to three years' worth. But anything over this you could consider putting it to work in a fixed-term savings product.

Fixed-term products pay a guaranteed rate of interest which is usually higher than instant or easy-access products. The trade-off is you usually can't access your money until the term ends. And right now, fixed-rate savings rates are more attractive than they have been for years.

But you don't need to lock your money away for years if you don't want to. While many banks only offer fixed-term savings for a year or more, through Active Savings you can currently get three and nine-month fixed terms. Generally, the longer you fix for, the better the rate.

Locking in rates can be useful when rates are falling or staying flat. But the opposite is also true – you could lose out if rates rise further in the future.

Depending on when you're likely to need your savings, you could also think about blending fixed terms of different lengths, or open new fixed terms regularly. That way you'll always have some money coming back regularly, while boosting your overall rate.

It's worth pointing out, currently, fixed-term rates don't beat inflation, so the purchasing power of your money will still be eroded over time.

And for those looking to make the most of their tax-free allowance, Cash ISAs are at their highest levels in over a decade.

3. Make a change today

Doing nothing and leaving your cash savings earning little or no interest costs you money.

You might think that it's best to keep your money where it is and wait in the hope that rates rise further. But with inflation so high, it's important to try to limit the damage it can have on your cash savings. You could miss out on better returns over the next year by not taking action now.

Active Savings gives you online access to a range of easy-access and fixed-term savings products across lots of banks and building societies.

You'll have a choice of competitive rates (often far higher than the big high-street banks) and opening new products is easy and takes just a few clicks.

You'll see everything together in one place when you log in, alongside any other HL accounts you hold with us – making things easier for you.

Explore Active Savings

And if you are looking to make the most of your tax-free savings, you can now get the highest ever Cash ISA rate through HL.

Discover our Cash ISA