The latest rate rise means the Bank of England (BoE) has now hiked interest five times in the last six months; in theory, banks then pass rate rise on to mortgage rates and savings interest rates.
Cash savers normally treat a rise in the base rate as good news, but our research shows that between 2016 and 2021 banks and building societies were actually twice as likely to cut savings account rates whenever the base rate was lowered, compared to passing along a base rate rise.
Here, Which? explains what past base rate changes have meant for savers, and whether certain types of savings accounts are more likely to be affected.
Is the base rate being passed on to savers?
We looked across a range of savings accounts offered by banks and building societies, both before and after the BoE announced a change in interest.
After both the 2016 and 2020 cuts to the base rate, around 20% of savings accounts had their rates slashed within three weeks. By comparison, when the base rate rose in 2017, 2018 and 2021, just 10% on average had increased their rates after three weeks.
This is particularly worrying for savers when inflation is so high.
Laura Suter, head of personal finance at AJ Bell, says: ‘Inflation is still eating away at cash, with no savings rate coming anywhere near current 9% inflation.
‘It means that even if savers are accessing the current top-rate easy-access account, which pays 1.56% AER, they will still be losing almost 7.5% in real terms. On £10,000 of savings, that is a loss of £744 a year in real terms.’
This is still an issue even when looking at the top-rate five-year fixed-term savings accounts – which tend to pay far more interest than instant-access accounts.
The graph below shows how the top five-year account rates have compared to CPI inflation and the BoE base rate since November 2021, a month before the successive base rate rises began in December.
How do different types of savings accounts fair?
Savers valuing quick access to their money will be pleased to hear that instant-access accounts were the least sensitive to base rate falls. However, they were also the least sensitive to a base rate rise.
For those thinking of locking away their money for longer in one-year and five-year fixed accounts, our research found that these were more sensitive to a base rate change (for new customers), particularly five-year fixes.
For example, following the 2016 and 2020 cuts, over 70% of instant-access accounts remained unmoved after three weeks. But for one-year fixes more than two thirds (37%) of accounts had passed along the cut after three weeks, rising to two fifths (41%) for five-year fixed accounts.
Cuts also tended to be larger across the fixed-term accounts, with the biggest reduction coming from United Bank which slashed its five-year fix down from 1.76% to 0.61% in 2016.
Similarly, when the base rate rose in 2017, 2018 and 2021, around 86% of instant-access access accounts stayed static.
One-year fixes did little better, with just 15% on average passing along a hike after three weeks, but some 22% of five-year fixes did manage a hike.
High street banks slow to pass on interest
Following the base rate rise in December 2021, 2022 has seen four additional rate rises, with most experts agreeing that more are on the way.
This seems to have finally spurred some action, with 38% of savings accounts registering a higher rate three weeks after the February rise, and 28% two weeks after the increase in May.
But rates on some of the largest banks’ instant-access accounts remain on the floor. Aside from Barclays’ pitiful rate, Halifax pays 0.25% and Lloyds Bank just 0.2%.
‘The high street giants are offering abysmal rates on their easy access savings,’ says Sarah Coles, senior person finance analyst at Hargreaves Lansdown.
‘Despite five Bank of England rate hikes in six months, the banks have barely moved – with a typical rate on branch-based accounts rising from 0.01% to just 0.1%. Barclays, meanwhile, has chosen not to increase the rate at all.
‘The problem lies in the ‘flight to familiarity’ we saw during the pandemic, when savers flooded back to the high street with record lockdown savings. This gave the high street giants plenty of easy access cash, so they didn’t need to boost savings rates to attract more money.
‘Anyone who is sitting tight with their cash on the high street in the hope that rates rises will eventually reach them would be far better off switching to a more competitive account from a smaller and newer bank.
‘These have been creeping up ever since rates first started rising, so now you can make 1.5% AER or more with three separate providers.’