Why savings rates go up and down (and what that means for you)

Savings rates have a habit of moving around.

One minute they’re up, the next they’re down. A bit like British weather. But there’s usually a reason behind the changes.

Here’s a simple look at what makes savings rates move, what it  means for your money, and how different types of savings accounts work.

No jargon. No economics degree required.

So, why do savings rates change?

Savings rates are influenced by what’s happening in the wider economy. Banks and building societies look at things such as the Base Rate, inflation, how much money they need to attract and lend, and what other providers are offering.

Here are some of the main things that can make a difference.

1. The Bank of England’s Base Rate

You’ve probably heard the phrase Base Rate quite a lot.

It’s the interest rate set by the Bank of England, and it influences the rates banks and building societies charge for borrowing and offer on savings.

When the Bank Rate rises, savings rates will often rise too. When it falls, savings rates may fall.

But it’s not quite as simple as one rate going up and every savings account following suit. Banks consider a range of factors when setting their own rates.

In short: Base Rate matters, but it isn’t the whole story.

2. Inflation

Inflation is the rate at which the prices of goods and services increase over time.

You’ll probably notice it most when your weekly shop costs a little more than it used to.

Interest rates are one of the tools used to help manage inflation. Higher interest rates can encourage people to save rather than spend, which can help reduce demand and bring inflation down over time.

So, while inflation doesn’t automatically dictate what happens to your savings rate, it’s part of the bigger economic picture.

3. Competition

Banks and building societies compete for customers and deposits.

That means the rates available across the market can vary, and providers may change their rates as their own funding needs and competitive position change.

So, if you notice two savings accounts offering different rates, that could be because of a range of factors across that particular bank or the economy as a whole.

There’s usually more going on behind the scenes.

4. What’s happening in the wider economy

The economy is a big moving machine, with plenty of different parts.

Things such as economic growth, borrowing, household saving and financial market conditions can all influence how banks set their rates.

Which is why savings rates don’t always move at the same time, or by the same amount, as the Base Rate.

What does a savings rate actually mean?

Quite simply, your savings rate tells you how much interest you could earn on the money in your account.

The higher the rate, the more interest you’ll generally earn, assuming the same balance and the same period.

For example, if you had £10,000 in an account paying 3% interest for a year, you’d earn around £300 in interest if the rate stayed at 3% for the full year and no other factors affected the calculation.

Of course, savings accounts can work differently depending on how and when interest is calculated and paid as well as any special conditions on the account such as withdrawal penalties.

That’s why it’s always worth checking the account’s terms and conditions.

Easy Access or Fixed Term: what’s the difference?

The rate isn’t the only thing to look at when choosing a savings account. How and when you can access your money matters too.

Easy Access Savings

As the name suggests, Easy Access savings are generally designed to give you more flexibility.

They can be useful when you want to keep your money available while still earning interest.

The benefits can include:

• Easy access to your money when you need it, subject to the account terms
• The ability to add money over time, depending on the account
• The flexibility to keep your savings in the account for as long as you like
• The potential to earn interest while keeping your savings accessible

Depending on the account:

• You may be able to make withdrawals without giving notice
• Additional deposits may be allowed
• The interest rate is usually variable, meaning it can change over time

The trade-off? You get more flexibility and access to your money, but the interest rate can change.

Explore Easy Access Savings

Fixed Term Savings

Fixed Term savings work a little differently.

You agree to leave your money in the account for a set period, such as one or two years, in return for a fixed interest rate for that term.

The benefits can include:

• A fixed interest rate for the agreed term, so your rate won’t change during that period
• The potential to earn a higher AER than some easy access accounts
• Knowing the interest rate that applies to your savings for the agreed term

Depending on the account:

• You may not be able to make withdrawals before the term ends
• Additional deposits may not be allowed after the account is opened
• Your money becomes available according to the account’s maturity terms

The trade-off? You have less flexibility while your money is in the account, in exchange for the certainty of a fixed interest rate for the agreed term.

Explore Fixed Term Savings

What happens if savings rates fall?

If you have an account with a variable rate, such as an Easy Access account, the rate may change.

If the rate falls, the amount of interest you could earn in the future may also fall, assuming your balance stays the same.

If you have a Fixed Term account, the rate is generally fixed for the agreed term, so it won’t change during that period.

The important thing is to understand what type of rate your account has and when it can change.

What about FSCS protection?

There’s another important thing to understand when choosing where to keep your savings: FSCS protection.

The Financial Services Compensation Scheme (FSCS) protects eligible deposits held with UK-authorised banks, building societies and credit unions.

The current protection limit is £120,000 per eligible person, per authorised firm.

A few things are worth knowing:

• The limit applies per person, per authorised firm
• It covers eligible deposits, including savings and fixed-term deposit accounts
• If you have several accounts with the same authorised firm, the balances are generally added together when applying the limit
• Different brands can sometimes operate under the same banking licence, so it’s the authorised firm that matters rather than simply the brand name

For the full details, including how FSCS protection applies to your circumstances, visit the FSCS website or use its protection checker.

And what does being a regulated bank mean?

Banks that carry out regulated activities in the UK are subject to rules and requirements designed to protect customers.

The Financial Conduct Authority (FCA) regulates the conduct of financial firms and requires firms to pay due regard to customers’ interests and communicate in a way that is clear, fair and not misleading.

For savings customers, this includes rules around accepting deposits and how firms communicate with their customers.

Being regulated doesn’t mean every product is right for every person. It means the firm has to meet the relevant regulatory requirements and standards.

So, what should you look at when comparing savings accounts?

There’s more to a savings account than the number at the top of the page.

It’s worth checking:

The interest rate
How much interest could you earn?

Whether the rate is fixed or variable
Could it change during the time you have the account?

Access to your money
Can you withdraw whenever you need to, or is your money tied up for a set period?

Minimum and maximum balances
Are there limits on how much you can save?

How and when interest is paid
For example, monthly or annually.

Any conditions or restrictions
Are there limits on withdrawals, deposits or early access?

A rate might look appealing, but the account needs to work for how you plan to use your savings too.

TL;DR

Savings rates go up and down because the wider financial world is always changing.

Base Rate, inflation, competition and wider economic conditions can all play a part. And because different savings accounts work in different ways, it’s worth looking beyond the rate alone.

If you remember just five things, make it these:

• Base Rate can influence savings rates, but it isn’t the only factor.
• Variable rates can change.
• Fixed rates are fixed for the agreed term, subject to the account’s terms.
• Access matters just as much as the rate.
• Eligible deposits with authorised firms may be protected by the FSCS, subject to its rules and limits.

No crystal ball required. Just a little understanding of what’s going on behind the rate