The debate over when interest rates will rise is a live one, with predictions of a rate rise pushed back or brought forward depending on the latest economic data or changes to the Monetary Policy Committee at the Bank of England.
While a rise in rates would be a cause for concern for many mortgage holders, it would be seen as a welcome boost for savers.
Outlook
The view that the Bank of England’s Monetary Policy Committee is calmly waiting for the economy to sure-up before risking a rate rise was supported on 23 May by the Bank’s executive director of markets, Paul Fisher.
In a speech in Scotland, Fisher said ‘putting up Bank Rate could be exactly the wrong thing to do at this precise moment’, adding that he believed there was time for the economy to recover before the ‘eventual tightening’ of monetary policy begins.
With the Bank Rate, which largely dictates mortgage rates and savings accounts rates, staying at 0.50 per cent ever since March 2009, the only inevitability is that the rate must rise at some point.
When rates will begin to rise is the contentious issue, for some economists it will be before the end of 2011 and for others rate rises won’t begin until 2012.
Pressures on the Bank
The pressure of rising inflation is the key weight on the Bank’s decision on whether to raise rates. Believing the current high inflation – the latest official CPI inflation measure is 4.50 per cent – is a mixture of imported and temporary factors, the Bank is happy to wait and see on the economy.
The international think-tank, the Organisation for Economic Co-operation and Development (the OECD) said on 25 May that the ‘normalisation of interest rates will need to start during 2011 to stave off significant increases in inflation expectations’.
Take the bonus or fix
Whether you opt for a temporary bonus rate or a fixed term for your savings will largely depend on your circumstances, but interest rates may be a consideration.
It is a near certainty that any rise in the Bank Rate will be incremental, i.e. it will not shoot up overnight; the Bank is likely to increase from 0.50 per cent in stages.
In a recent interview with the Financial Times, the Bank of England’s chief economist Spencer Dale indicated rates would rise gradually over the next two years.
Bonus rates
Savings accounts currently offering temporarily boosted rates include the e-Saver from Santander which offers savers 3.00 per cent AER with a 12 month variable bonus of 2.50 per cent.
The ING Direct Savings Account has a variable rate of 0.50 per cent but is offering customers 3.00 per cent AER, boosted by a 12 month bonus.
Although these accounts are below the level of inflation, they are instant access, allowing you to move your money without penalty if better rates start to come along after 12 months.
Compare a range of instant access savings accounts »
Fixing
If you’re unlikely to move your savings on a regular basis and are happy to fix on a higher rate now, then fixed rate bonds may be the solution. Medium and longer term fixed rate bonds can offer competitive rates.
For example, the Birmingham Midshires 2 Year Fixed Rate Bond offers 3.85 per cent AER for locking away your money for two years. After the two years it would be possible to take advantage of any new savings options that become available.
If you’re happy depositing savings for three years, the 3 Year Fixed Rate Bond from Santander pays 4.01 per cent AER interest, at least getting close to the latest rate of inflation.
Compare leading fixed rate bonds »
© Fair Investment Company Ltd