Why the cuts in savings rates will come to an end

26/05/2020

The word 'unprecedented' has been overused in the past two months but these are truly extraordinary times in the savings market.  The last couple of days of last week saw some truly remarkable activity in the savings market with a host of providers changing rates.  Other than PCF Bank relaunching their 3 Year Fixed Rate, all the pricing movement was downwards.  Here's a summary, by product category, of the changes, to put some context to their sheer volume of rates which have been cut:

Easy access

* Aldermore cut their rate from 1% to 0.80%

* Shawbrook reduce from 1% to 0.75%

Notice

* Close withdraw their 95 day notice 1.35%

* Paragon reduce their 120 Day notice from 1.20% to 1.05% and 45 day notice from 1.10% to 1%

1 Year:

* Gatehouse Bank drop their best buy 1.50% to 1.25%

* Hodge Bank cut from 1.34% to 1.20%

* Ikano reduce from 1.36% to 1.21%

* Paragon drop from 1.25% to 1.10%

* Zenith Bank reduce from 1.43% to 1.15%

2 Year:

* SmartSave cut from 1.40% to 1.35%

* Gatehouse drops from 1.60% to 1.35%

* Hodge Bank cut to 1.25%

* Ikano drop from 1.46% to 1.31%

* Paragon reduce from 1.40% to 1.25%

* Shawbrook reduce to 1.25%

* Zenith Bank cut from 1.53% to 1.30%

3 Year:

* SmartSave cut from 1.45% to 1.40%

* Gatehouse reduce their best buy from 1.75% to 1.45%

* Hodge Bank cut to 1.30%

* Ikano drop from 1.56% to 1.41%

* Paragon reduce from 1.50% to 1.30%

* PCF relaunch at 1.50%

* Shawbrook Bank reduce from 1.68% to 1.30%

* Zenith Bank cut from 1.57% to 1.40%

5 Year:

* Gatehouse reduce their best buy from 1.85% to 1.55%

* Ikano drop from 1.71% to 1.56%

* Paragon cut from 1.60% to 1.40%

On top of this, Charter Savings, Gatehouse, Hampshire and Principality all cut or withdrew ISA rates too.  Of the ten providers in our 1 Year table, only Atom Bank and BLME (Bank of London & Middle East) remain as they were.  All other providers have either cut been promoted in to the tables due to the rate changes.

There are a number of reasons why this is happening.  There's been a drop in lending activity which these savings book fund, the new TFSME (Term Funding Scheme for Small & Medium Enterprises) has started to be drawn on by some banks and the Bank of England Base Rate has been cut.  However, fundamentally, we are now in a vicious circle where providers are cutting in response to other movements, which then triggers other banks to respond, to avoid getting over liquid with savings.  The upshot is, everyone moves!  That's ultimately where we got to at the back end of last week where it was possible to see that both the timing of the change, and the rates being moved from/to, in many cases were clearly a reaction not a scheduled change.

The question which savers want to know is where is it going to end.  Longer term, that's incredibly hard to predict but short term it is very clear.  We are in for more of the same.  However, there will be a floor and government owned National Savings & Investments is going to provide that floor.  It had a round of planned rate cuts which were due to take place on 1st May.  They were pulled in light of Covid-19 and this has now seen their Direct Saver (1%) enter the easy access best buys and, if you class their monthly interest paying Income Bonds (1.16%) as an easy access account, Income Bonds top it.

NS&I works differently to banks and this is going to provide the floor to stop further falls in the short term.  In easy access, I expect the position to remain broadly as it is with best buy rates around 1%. For 1 Year Bonds, I expect a fall back towards 1.20 - 1.25%, 2 Year around 1.35%, 3 Year at 1.45% - 1.50% and 5 Year around 1.60%.  NS&I don't have a regular scheduled date to review rates so it is impossible to know when they will recommend reductions but, they give two months notice of changes to rates so we are looking at August at the earliest for any cuts.  While I expect there will still be much movement and jostling for position, I don't foresee the headline rates changing significantly i.e. the providers may change but expect those best buy rate levels to hold, regardless of which provider is paying those rates.

What do I expect to happen next? BLME now sit top of all bar 5 Year Fixed Rate Bonds so I expect a re-price of their range, in response to the changes.  Atom's 1 Year at 1.40% looks unsustainable and I expect that to be cut by the end of the week, by at least 0.15%.  Wyelands can also not maintain their 1.30% price point and will cut too and expect Habib Zurich to make yet another cut to their 1 Year too.  I don't think we will see anything near Atom's 1.40% or BLME's 1.45% anytime soon so 1 Year savers should secure those while they can.

RCI's 5 Year rate of 1.80% is a historical low for 5 Year savings but this current best buy pricing will look generous by the end of next month.  While I cannot recommend locking away money at that price for 5 Years, it will look very competitive to what will be there in the coming weeks.

There will be more volatility in the coming days and weeks but this will stabilise as rates settle around these price points.  My advice to savers is secure these rates while you can.