Base rate cut passed on to savers: is it time you found a new home for your cash?

With inflation expected to rise to 3.7% this year, it’s important savers find an account that helps their money grow in real terms.

Savers would be wise to review their accounts and make sure they’re seeing real returns on their hard-earned cash as last week’s cut to the Bank of England base rate takes its toll.

While it’s only been a matter of days since the UK’s central interest rate was lowered to 4.50%, the average rate paid by an easy access account has already dropped by 0.04 percentage points to 2.86% as providers pass on the reduction.

With inflation forecast to accelerate to 3.7% by the latter half of this year, failing to earn competitive returns could see the rising cost of living quickly diminish the purchasing power of your savings.

We explore some of the options that could help your money grow:

Get guaranteed returns with a fixed bond

Fixed bonds offer an interest rate that is guaranteed to remain the same over the course of a term in exchange for having little or no access to your cash. This can protect against declining rates in the wider market (but conversely means you won’t reap the reward if rates were to rise).

However, returns in the sector aren’t immune to the base rate’s influence; providers will often pre-empt changes to the UK’s central interest rate when setting their fixed prices. As a result, the average rate paid by a one-year fixed bond fell from 4.62% and 4.21% between February 2024 and the start of this month, according to latest Moneyfacts’ data. Meanwhile, the very best one-year fixed rate plummeted from 5.16% to 4.77% over the same period.

“Savers who invested £10,000 in the top one-year fixed bond a year ago would have earned £516 in interest, however, those expecting their bond to mature this month and considering locking in again for the same term can now expect to earn almost £40 less,” explained Caitlyn Eastell, spokesperson for Moneyfactscompare.co.uk. She therefore urged those wishing to lock away their cash to move quickly if concerned about rates falling further.

While the best one-year fixed rate continues to outperform all other terms, Eastell also encouraged consumers to “consider the benefits of stashing away their pots for longer-term to outpace interest rate reductions”.

Average rates across all fixed terms saw a slight recovery in the month to February, but typical returns on a four- and five-year fixed bond made the biggest monthly strides, growing by 0.09 and 0.07 percentage points respectively, which may add to their appeal. What’s more, in contrast to their shorter-term counterparts, these sectors now offer higher rates on average than a year ago, paying 3.98% and 3.93%, respectively, on a first-of-month basis.

But, before they take the plunge, Eastell reminded consumers that longer terms “come with more hefty penalties should savers need to access their savings early”.

Shop around for more competitive returns

Otherwise, savers who rely on the flexibility of an easy access account should closely monitor the market in the coming weeks and may want to consider switching if more competitive rates are available - especially if the returns they’re currently receiving dip below inflation.

This is particularly important for those not seeing their loyalty repaid by high street brands, who may be missing out on hundreds of pounds of interest each year.

At the start of last week, Moneyfacts’ data revealed the average rate offered by easy access accounts from a selection of the UK’s biggest banks was a lowly 1.66% (gross)^*; by comparison, today’s market-leading easy access account (without a short-term introductory bonus) pays a considerably higher 4.85%. When applying these rates to a £10,000 deposit over the course of a year, savers could potentially be more than £300 better off for making the move^**.

Utilise your annual ISA allowance

However, those switching to a higher-paying alternative must be mindful of their tax-free savings allowance.

“Despite dwindling rates, higher rate taxpayers may still be on course to breach their £500 interest-earned Personal Savings Allowance (PSA), so careful planning is a must,” said Eastell.

Savers who run the risk of exceeding their PSA and, as a result, having to pay tax on the interest they earn could benefit from a tax-wrapper, such as an ISA. Each tax-year, you can deposit a combined total of up to £20,000 in ISAs, with any interest automatically exempt from Income and Capital Gains Tax (CGT).

And, with the end of the 2024/25 tax-year fast approaching, it may be that providers launch attractive new rates or products in the coming weeks to entice savers looking to use up any outstanding ISA allowance before it resets when the new tax-year starts.

Related guide: What is ISA season and why does it matter for your savings?

_{*High street banks include Bank of Scotland, Barclays Bank, Halifax, HSBC, Lloyds Bank, NatWest, Royal Bank of Scotland and Santander. Averages collected from gross interest rates paid across all live easy access accounts with these brands based on a £10,000 deposit, latest rates as of 3 February 2025.}

_{**1.66% applied to £10,000 deposit over the course of one-year amounts to £10,166; 4.85% applied to the same balance over the same period equals £10,485. £10,485 - £10,166 = £319}