Could savings deals now creep back above 5%? 

Could savings deals now creep back above 5% as persistent inflation drives up interest rates or should you lock in a deal now?

Persistent high inflation is squeezing household budgets ever tighter. But for savers, there is a silver lining — of sorts.

Savers are enjoying the best interest rates they have seen for years thanks to soaring inflation. And some experts say rates could jump even higher yet.

Interest rates have climbed since official figures revealed last week that inflation remains stubbornly high. Now at 10.1 per cent, inflation has been in double digits since last September.

Savers can now enjoy a top deal on a one-year fixed rate account of 4.7 per cent, currently offered by Shawbrook Bank and Close Brothers Savings. The best deal at the beginning of this month was lower, at 4.35 per cent.

Top deal: Savers can now enjoy a top rate on a one-year fixed rate account of 4.7%, currently offered by Close Brother Savings and Investec Bank

Savers can achieve similar rates even if they wish to lock their money away for longer. 

The top five-year rate is 4.65 per cent from Atom, 4.61 per cent from United Trust Bank, or 4.6 per cent from Monument Bank and Tandem Bank. 

Three-year rates sit around the same level with the best rate at 4.67 per cent from DF Capital.

The caveat, of course, is that high inflation erodes the value of your savings over time — meaning each pound won’t stretch as far in the shops.

Could rates rise higher still? 

The Bank of England is relentlessly pushing up interest rates in its drive to curb rampant inflation. This time last year the base rate was just 0.75 per cent – today it is 4.25 per cent.

But despite its efforts, inflation is still not under control. That means the Bank may choose to raise interest rates even higher, to 4.5 per cent, when it makes its next rate decision in two weeks.

Savings rates have risen dramatically over the past year.

Savings rates have risen dramatically over the past year. 

Traders in the money markets are even betting that the Bank of England may push the base rate up to a peak of 5 per cent later this year. 

Until recently, they were predicting that rates would level off at 4.5 per cent per cent, but obstinately high inflation has forced a rethink.

Should the base rate continue to rise, so may interest rates available to savers. That is because the level of the base rate is one of the biggest factors that savings providers consider when pricing their deals.

Where to find the best deals 

Even if the base rate rises, savers will not automatically see the benefit. Banks and building societies are often sluggish to pass on rate rises to savers — especially the larger High Street banks. 

Savers will need to shop around to find the best deals.

Multi-year fixed-rate bonds in particular may not rise in line with the base rate. That is because providers set their rates based on what they think the base rate will hit in the future, as well as on its current level.

For example, if they believe rates will fall to 2 per cent in the coming months, they will not want to be left paying interest rates of close to 5 per cent for several years.

Should you fix for longer?

Rates may continue to rise, but there is no guarantee. A spokesman from the website Savings Guru says it is not worth holding out for a better rate.

‘We think fixed rates have peaked and will fall back, but there may be some short-term fluctuations,’ he says.

‘It’s a gamble to wait, hoping for higher rates. Any savers who fix for one year will get a lower offer at maturity.

‘Those who want the highest rates should take the best three- or five-year fixed rates currently on offer.’

Some experts are predicting that rates may even start to fall in the coming months.

Adam Thrower, head of savings at Shawbrook Bank, which is consistently among the top payers, says: ‘There could well be another rate rise or two from the Bank of England before things start to slow down, but certainly the consensus is that we’re nearing the top of the savings peak — we could even see a possible reversal in interest rates.’