Fixed-rate savings surge: Interest on the typical one-year bond hits a 15 year high with new 4.66% best buy paying MORE than the top five-year deal
- Average one-year fix now pays 3.9%, up from 1.08% a year ago
- The best deal pays 4.66%, which is more than savers can get on a five-year fix
- Bank of England expected to hike base rate higher than previously thought
One-year fixed-rate savings deals are nudging higher as money markets forecast the Bank of England to increase base rate higher than previously thought.
The typical one-year fix now pays 3.9 per cent, according to Moneyfacts, the highest level since December 2008 and up from just 1.08 per cent a year ago.
In an unusual scenario, it now means this top fix for 12 months pays more interest than the best five-year fix – 4.65 per cent from Atom Bank.
14-year high: One-year fixed term savings rates have on average not been this high since December 2008
Savers stashing £10,000 in SmartSave’s deal will earn £466 in interest over the course of a year.
That’s £111 more than savers will earn from £10,000 best easy-access savings rate paying 3.55 per cent.
At the start of February, the best one-year fix was paying 4.16 per cent.
Earlier this year, it appeared fixed-rates had peaked, but in recent days they have risen again after higher than predicted inflation has put pressure on more base rate hikes.
The average one-year fix has risen from 3.61 per cent in February to 3.9 per cent as of today.
Why are one-year fixes rising?
Rates are rising due to market expectations about where the base rate will peak.
These expectations are reflected in swap rates. A swap is essentially an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.
Swap rates have edged up recently in part because inflation is proving stickier than expected.
Inflation fell by less than expected to 10.1 per cent last month, partly due to a huge rise in food prices, up 19.1 per cent on the same period last year.
Economists expected inflation to fall to 9.8 per cent from 10.4 per cent in February.
Instead, last week’s figures revealed the seventh month in a row of double-digit inflation.
The Bank of England, which targets 2 per cent inflation, is now expected to increase base rate (currently at 4.25 per cent) further than expected in the hope of bringing inflation to heel.
A 0.25 percentage point increase to 4.5 per cent next month and a further rise to 4.75 per cent in the summer are now viewed as almost certain by markets.
Best accounts at a glance
There are none that beat inflation this month, however, make sure you shop around for the best returns possible.
Easy-access: Chip – 3.55%
Limited-Access: Yorkshire BS – 3.6%
One-year fixed-rate: SmartSave Bank – 4.66%
Two-year fixed-rate: Al Rayan Bank – 4.72%
Anna Bowes, co-founder of savings website, Savings Champion, said: ‘Short-term bonds are increasing again and competition is rife.
‘Markets are predicting the Bank of England might need to increase interest rates to a higher level than previously thought, as inflation is proving to be more stubborn than expected.
‘Most experts expected to see inflation fall back into single digits last week.’
A spokesman for the savings website, Savings Guru, added: ‘We’re living in unusual times with the best one-year rate currently priced above the best five-year.
‘The reason one-year rates are so high is that it reflects that swap rates, which have hit 4.72 per cent for one-year.
‘This means the market is expecting Base Rate to peak in the next year and then fall back, which is why longer term swap rates are below 4 per cent.
‘Previously, the market was pricing in 4.25 per cent as a peak for base rate but now it is expected that we will go to 4.5 per cent in May and peak at 4.75 per cent.’
How high will one-year fixes go?
Given the market expected base rate to rise even higher back in October, following Liz Truss’ mini-Budget fiasco, it’s hard to see the top rates getting much better.
Anna Bowes says: ‘The market prediction for base rate is not quite as high as it was in October, when we though base rate night need to be raised to 6 per cent – 4.75 per cent might be a stretch but it would be good to see a little more to come.
The Savings Guru also believes that rates are unlikely to rise much higher, with longer term fixes having already peaked.
‘We always thought base rate will hit 4.5 per cent in May and haven’t changed on that opinion.
‘Currently, we’re not expecting it to go higher than this so our view is that savers might get a basis point or two more on one-year but longer term fixed rates have almost certainly peaked.
‘Easy-access rates have room for growth and we do think that best buys will head towards 3.75 per cent if base rate goes to 4.5 per cent.’