The Bank of England’s Monetary Policy Committee (MPC) has again left the rate at its historic low of 0.5% in its January Meeting. Until the minutes of the meeting are released we will not know how close it was to actually being changed. Savers have been hoping for a change in the rate as they have been experiencing returns on deposit that have been less than generous when compared to past year’s deposit returns before the economic crisis.
Inflation has been forcing the talk of a rate increase and forcing pressure on the MPC. They have demonstrated though that they are not going to react to rising inflation quickly. The increase in VAT and government spending cuts have yet to be fully realized and an increase to the rate could come too soon and put recovery at a standstill or worse yet into reverse. So while an increase is being called for by some economists and forecasted for the future by others, it doesn’t appear that savers will be benefitting from a surprisingly high interest rate right out of the gate.
If there is a rate increase in the standard base rate, it will likely be a small change in the start. The economy will be shifting and groaning from weights pressing on it from other directions, the rate change will merely be one more factor at play. So, a saver should not be waiting out for a huge increase to make everything all right with their savings investment. Instead they should be considering the future and what directions they should take with their savings accounts now that will allow the greatest return when increases occur.
A change to a new type of account may be the best bet, in fact shopping around to move your savings account might even be an order of good business practice when it comes to savings. The type of account one chooses should be one that will allow bigger rewards if indeed the rate increases steadily over the years to come. Therefore, long term accounts might not be the best bet, but rather short term accounts that do not lock you into lower interest rates.
Danny Cox, a financial adviser with Hargreaves Lansdown, says: “Savers shouldn’t tie up their cash for more than a year, as there is a strong likelihood of rates rising during that time.
“With a longer-term bond, the danger is that you’re suddenly tied to a low rate where, in five year’s time, interest rates could be up near 8% for all we know.”
Michelle Slade, savings expert at Moneyfacts.co.uk, says: “Once base rate does start to increase, providers may opt to only pass on part of the increase to savers in an attempt to claw back their margins.”
Andrew Hagger, of Moneynet.co.uk, suggests that savers split their deposits between slightly longer-term fixed rates and shorter term or instant access accounts. This way, the deposits allow a boost in overall rate of return while still allowing savers the ability to take advantage of a hike in the base rate.
There are not any savings rates currently found that are above the rate of inflation, but there are some good short term deals that will be good choices should the rate increase bit by bit over time. What is important is that savers choose accounts that do allow the ability to benefit from increases versus losing out on returns due to being locked in to deals that were good presently. It is all about preparing for what may come ahead and being ready in this economy and that advice is the same for savers as well.
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