What can change a savings rate – and how can I beat it?

With inflation dropping below its 2% target to just 1.7% in September – the lowest level in three years – experts are now predicting that the Bank of England base rate will be cut one to two times more before the end of the year. 

This is significant for savers as it impacts the level of interest paid on deposit accounts and would mark the second (or third) time the rate has dropped in the last four years. 

Charlene Young, Pensions and Savings Expert at AJ Bell, says: “It’s important that people relying on cash interest to supplement their income in retirement keep alert to falling rates and be prepared to switch to find a better deal for their cash, rather than leaving the money sitting in an old savings or current account earning little or nothing.” 

But if you’re surveying the landscape of potential saving options or using a comparison service to decide where to place your money, you might be wondering why there’s such a range of offers available and how it relates to the Bank of England’s decisions on the base rate. 

What affects the base rate? 

The base rate is the interest rate that a central bank (the Bank of England in the UK), charges commercial banks and other lenders for loans.  

In turn, it influences the interest rates charged on mortgages and loans, and interest paid on savings accounts. 

Changing the base rate is one of the tools the Bank of England can use to control rising prices. When inflation is high – as it was when it reached 11% in 2022 – policymakers may increase the base rate, in the hope that it will cool consumer spending and borrowing and force prices down. 

So, now that inflation has come down, there's a stronger argument for the Bank of England to reduce interest rates. 

The relationship between base rate and savings rates 

When the base rate changes, it's usually reflected in the interest rates that banks pay on savings accounts, although these normally pay less than the rate set by the Bank of England. 

In theory, when the base rate goes up, banks should increase the amount of interest they pay on savings.  

But there’s no obligation for all banks to do this, or to pass on the full increase – although they are required to treat their customers fairly, and there has been more pressure on some banks to ensure their rates are more attractive. 

Conversely, when base rates fall, banks will likely reduce the interest they pay to savers – these changes can vary by bank, depending on how many savers they want to attract and the amount of funds they wish to have on their balance sheets. 

There are a variety of other factors that can affect savings rates; these will often vary by individual bank, depending on profit targets, operational costs or other regulatory requirements. 

Competition between savings institutions 

There’s a wide range of savings accounts in the UK market, with new entrants launching regularly.  

These new banks will need to attract retail deposits and raise their profile and one way to do that is to offer best-buy savings rates – although these can be limited-time only, to help control the inflows of savings. 

If a bank doesn’t need any extra deposits or new customers, it might decide to keep its savings rates lower than the competition. 

Different types of savings accounts 

Interest rates on savings accounts can be fixed or variable. Fixed interest rates stay the same throughout the term of the account – normally between one and five years for fixed-rate bonds.  

Most easy-access savings accounts have variable interest rates; these alter at any time, often in relation to the base rate changes, but a bank is required to notify customers about any fall. 

Some easy access accounts might include a ‘bonus’ or ‘introductory’ rate that only applies for a set period - typically a year. After that the interest rate may be reduced, so it’s important to stay on top of any bonus time frames ending.  

Savings and inflation 

Savers should also be thinking about the effect of inflation on cash savings. If a savings account is paying less than the inflation rate, the spending power of the money in it will gradually be reducing over time. 

Alex Edmans, Head of Retirement at Saga Personal Finance, says: “Over 50s hold the most in household savings out of any other age group, and with savings rates currently high they can generate real returns on their cash above the rate of inflation with no investment risk.” 

However, to ensure they get the best returns of their savings, it’s essential they shop around. 

“Just leaving cash savings in a current or savings account with their existing high-street provider will not necessarily give inflation-beating returns and the real value of their cash will, therefore, be eroded,” she adds.  

How to get a better savings rate 

The key to getting a better savings rate is to regularly review the interest rate you get on your money.  

Make sure you make a note in your diary when bonus rates are due to end on easy access accounts, and when fixed-rate bonds are due to mature. 

Edmans says: “Whilst interest rates are high, moving accounts could easily be worth an extra few hundred pounds a year on savings of £10,000 or more and most banks accept online applications now, which makes transferring straightforward.”