THE Moneyfacts Average Savings Rate has fallen from 3.40% to 3.35% in January, the lowest figure since May 2023 (3.20%). Over the past year, the rate has fallen from 3.64% to 3.35%. While savers may be feeling the pinch, some advisers said it could be a positive as falling rates will raise people’s awareness of the limitations of many cash products.
According to Moneyfacts, the average easy access ISA rate fell to 2.69% in January, while the average notice ISA rate fell for a third consecutive month by its biggest margin since September, to 3.34%.
The average one-year fixed ISA rate fell to 3.79%, its lowest level since April 2023 (3.68%) and the longer-term fixed ISA rate fell to 3.75%, last as low in March 2023 (3.72%).
The average easy access rate fell for the first time since October to 2.48%, its lowest since July 2023 (2.41%). The average notice rate saw its biggest fall since September to 3.42%, its lowest since June 2023 (3.12%).
The average one-year fixed rate fell to 3.85%, its biggest fall since June and its lowest since April 2023 (3.81%). The longer-term average fixed rate fell for a second month running to 3.80%, its lowest since November 2022 (3.77%).
Impact of the base rate cut
Caitlyn Eastell, Personal Finance Analyst at Moneyfacts, said: “A new era in the savings market may be taking shape this year, as savings rates are anticipated to fade from the peaks caused by the market volatility seen over the past three years.
“The impact of December’s base rate reduction is already making itself known, as all average rates have fallen for the first time in over six months and the number of accounts paying above base rate saw its biggest rise on record to 877, accounting for just under 40% of the market.
“However, this means that over 60% still don’t match base rate, leaving savers’ cash languishing and making it harder to build financial security.
“Interest rates are expected to settle around 3.25%-3.50%, the last time they were around this level was December 2022. During this time, the Moneyfacts Average Savings Rate was around 2.80%, whereas at the start of this year it was 3.35%. Similarly, the margin between savings and borrowing is around 0.24% lower than this time last year.
“Together, this signals that current savings rates may not last and there’s still plenty of headroom for rates to fall. Any fluctuations against the trend are likely to be providers reacting to individual targets.”
The limitations of cash
Philly Ponniah, Chartered Wealth Manager at Philly Financial, said she would frame the fall in average savings rates as a positive in some respects, as it creates “a moment of friction” and awareness of the limitations of cash.
She said: “When rates fall, people notice their money isn’t moving and that’s often the first step towards questioning whether cash alone is enough. The real positive is awareness, not behaviour change overnight.
“Falling rates make the trade-off clearer: safety versus growth. A small group will act by drip-feeding into investments or using stocks and shares ISAs, but many will simply shop around for better cash deals.
“So it’s a positive in terms of nudging the conversation forward, not because millions will suddenly invest, but because it slowly chips away at the idea that cash is a long-term solution.”
Inflationary pressures could resurface
Colin Low, Managing Director at Ipswich-based Kingsfleet, said that while the current trend on interest rates is down due to the reduction in inflationary pressures, things could change quickly in what is becoming a fraught geopolitical climate as Trump threatens tariffs on the UK over Greenland.
He said: “There are multiple issues building that could cause inflation’s ugly head to rise again. These range from more tariffs to rising oil prices, and from supply logistics to wage costs, all of which could see inflation increase once again.
“If that is to happen, rates may not reduce as rapidly as the market is thinking and, potentially, could even be reversed. From an investment perspective, investing is for the long term and savings should be for covering emergencies or for expenses in the next 3-5 years.”
The role of cash
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said: “Cash should primarily be held to meet short-term financial needs and provide stability, not to deliver long-term growth.
“While fixed-rate ISAs can look attractive on headline rates, savers must be very clear that early access usually comes with interest penalties, so this is not suitable money if there is any chance it will be needed.
“It is also no surprise that saving ratios are under pressure when the pound has been steadily losing purchasing power and everyday living costs remain high.
“For many households, using the full ISA allowance is simply not realistic, so the supposed advantage between fixed and variable rates becomes largely negligible in practical terms.
“The bigger risk is not missing out on a few tenths of a per cent in interest, but relying on cash for too long and watching inflation quietly erode spending power.”
Fighting chance
Ross Lacey, Director at Rayleigh-based Fairview Financial Management, added: “To have a fighting chance of keeping your buying power, investing is sensible. However, this should be done within the context of a proper financial plan that factors in when you’ll need the money and how you’ll deal with the inevitable periods of stock markets dipping.
“There will always be periods where the interest on cash savings is higher than what investments have returned, but this is an anomaly rather than a longer term trend.”
Like Ponniah, Scott Gallacher, Director at Leicester-based Rowley Turton, said falling savings rates will make people think twice about the role of cash.
He continued: “As savings rates continue to fall, savers will question whether it makes sense to accept negative real returns in cash. For money not needed in the short term, this could prompt many to invest, where returns have historically outpaced cash over the long run.
“While cash remains essential for rainy days and peace of mind, falling rates push people to think about how much they really need sitting on deposit.”
