Why 2022 could be the year savings interest rates finally start to improve

Stashing away more money is a popular new year’s resolution, but as 2022 draws closer would-be savers could be forgiven for lacking the motivation. 

At present, leaving your cash in savings can make you feel like you’re actually becoming poorer by the month.

This is because the cost of living is vastly outpacing the returns savers are making. 

Currently, there is not one savings deal able to keep up with the eroding power of inflation.

As of November, inflation reached 5.1 per cent – the highest it has been in 10 years.

Meanwhile, even if a saver were to lock their money away for five years, the best interest rate they could secure is 2.1 per cent. 

The Bank of England expects inflation to stay around 5 per cent this winter and then surge yet further to 6 per cent in April, when the energy price cap also rises. 

Savers who continue to keep their cash in easy-access accounts with high street banks paying as little as 0.01 per cent interest may well end up 6 per cent worse off year-on-year come April.

It will mean the spending power of £1,000 sat in an account paying 0.01 per cent interest will be diminished by £60. 

And even for savvy savers holding their cash in higher interest-paying accounts, it is just a case of damage limitation.

The best easy-access deal is with Investec and pays 0.71 per cent, whilst the best one and two year fixed rate deals with Gatehouse and Zopa Bank pay 1.41 and 1.61 per cent respectively. 

And inflation is not the only factor making that resolution to save more all the harder.

The pandemic has resulted in record levels of saving, according to the Bank of England’s figures, with many able to save more by working from home, travelling less and withdrawing from any form of social life.

If the threat of Omicron proves to be short lived and the UK enjoys a 2022 which is lockdown-free, saving will no doubt prove a harder discipline than it was for large parts of the previous two years.

However, if Omicron – or some other new variant – forces us into another lengthy lockdown, many people’s savings pots will stand to benefit.

UK savings accounts were boosted by an extra five per cent during the first half of 2021, with British savers adding on average, £1,237 to their balances. 

But that was not true for everyone, with some having lost jobs or remained on furlough during periods of heightened restrictions.  

James Blower, founder of The Savings Guru says: ‘Covid will continue to impact life generally in 2022 and this will mean there will be winners and losers, with some people seeing their savings bolstered and others being negatively impacted, particularly those on lower wages.

‘Covid was polarising in 2021 and it will continue to be so in 2022 – at least until we get out of winter.’

Will rates improve in 2022?

Although they remain in the doldrums, savings rates did increase in 2021 – but only for those who held their money with smaller providers rather than the big banks.  

Challenger banks jostled for customers and led the way on the rate recovery – the best easy access rate went from a low of 0.41 per cent to a high of 0.75 per cent whilst the best one year fixed rate deal went from a low of 0.56 per cent to 1.51 per cent.

Unfortunately, few of these deals remained on the scene for long before they were pulled.

The destiny of savings rates in 2022 is largely in the hands of the Bank of England’s Monetary Policy Committee. 

If inflation rises further, it is likely the Bank of England will respond by upping the base rate in an attempt to claw it back to its long-term target of 2 per cent.

The Bank of England responded to November’s inflation figures by raising the rate from 0.1 per cent to 0.25 per cent, the first rate rise in almost three and a half years.

The central bank’s chief economist Huw Pill has since warned that further base rate rises may be needed. 

Likewise, some economists now expect a series of rate rises next year.

Ruth Gregory, senior UK economist at Capital Economics, forecasts rates hitting 0.75 per cent in 2022, and George Buckley at Nomura predicted rates would be 1 per cent by the end of next year.

Although it is doubtful savers will see any benefit from the most recent base rate rise, further rises next year should help to push savings rates upwards.  

Two respected experts within the industry, Anna Bowes, co-founder of Savings Champion and James Blower, founder of The Savings Guru are both optimistic.   

Blower says: ‘The base rate rise today won’t be passed on to savers, but if we see significant movement in the base next year – perhaps a return to a base rate of 1 per cent or more, then this will be good news for savers and help to push up rates.

‘But the base rate will need to get above 0.5 per cent before we see even a proportion of any increases starting to be passed on to savers.’

Bowes adds: ‘There is definitely a feeling that 2022 will be a better year in terms of savings rates – not least because we are expecting at least one base rate rise.’ 

It is therefore expected that savers will need to be patient, with rates expected to rise at a very slow pace. 

‘Those savers hoping for 1 per cent on easy access or 2 per cent on a one-year fix are likely to be disappointed,’ says Blower. ‘But rates will start to head towards those levels during the year.’

‘It’s really hard to predict exact numbers but my expectation is that the best easy access rates will be around 0.9 to 0.95 per cent by the year-end and the best 1 year fixed rate deal will be circa 1.75 to 1.8 per cent.’ 

Ditch the big banks for the best returns 

If rates start to rise and inflation eventually begins to fall, then the outlook come the end of next year could be more cheery for savers.

They will benefit the most if they are proactive and seek out the best deals on the market, rather than leaving their cash stagnating with high-street banks.

UK savers have £967.4billion in easy access accounts, and the big banks paying a pittance hold around two-thirds of the balances. 

Research from Paragon Bank shows there is some £424billion in easy-access accounts where savers earn 0.1 per cent or less, whilst there is also £256 billion sitting around in current accounts earning no interest at all.

This is Money’s independent best buy savings tables can help savers pick the best deals on the market and at least get some form of return – though it might require choosing a niche provider they have never heard of.

They may not be household names, but all the banks and building societies included on our lists are registered with the Financial Services Authority and signed up to the Financial Services Compensation Scheme.

This means savers’ money is either directly protected up to £85,000, or indirectly protected via its passport scheme where the compensation limit depends on the bank’s home country. For banks based in Europe it is €100,000.

It is also important to point out that our tables are unbiased – we simply put the rates in order of the interest they pay, regardless of any affiliate link. 

Bowes says: ‘A number of providers – not the big banks funnily enough – have expressed that they will be looking to raise funds from savers so competition will hopefully be strong.

‘This means better rates will be available for those who are prepared to shop around and potentially use a provider that they have not heard of before.

‘As long as they make sure that the banks are fully regulated and the savings products they are advertising are cash savings accounts and therefore covered by the Financial Services Compensation Scheme, there’s no reason to shy away.’

Choosing the right provider is important, but the type of account you opt for is arguably even more crucial, particularly if you may require access to your savings at any given time.

‘Easy access accounts tend to offer the most flexibility, which in these uncertain times may well still be a priority for many,’ says Eleanor Williams, a finance expert at Moneyfacts.

‘However, those who are comfortable locking their savings pot away for a set period may find that they can receive higher returns from a fixed-rate bond.

‘As the rate is fixed at the point of investing for however long the account is set to run, these can be a good option for savers who are happy to secure their cash away to receive guaranteed return.’

She also urged savers to be aware of the £1,000 personal savings allowance, which means they pay no tax on savings interest below that level.  

While Isas offer tax-free saving of up to £20,000 per year, the interest rates on those accounts might be lower.  

‘Those looking to utilise their Isa allowance may wish to think about any personal savings allowance remaining, especially when comparing fixed rate options, as interest rates between the top fixed Isa and non-Isa rates can vary,’ Williams said. 

What else can savers do to boost their pots?  

Another option for those looking to eke a little more out of their rainy day fund is to sign up to a savings platform. 

They could consider savings platforms such as Raisin or Hargreaves Lansdown, or a digital savings platform like Plum or Chip, which not only can help savers to effectively manage their savings can also on occasions offer welcome bonuses or special rates when joining.

For example, Raisin is currently offering a welcome bonus giving savers the chance to boost their savings by £50 when they open and fund an account on its marketplace with a minimum of £10,000 – although it’s worth noting that the bonus only applies to one’s first savings account with the platform.

It may not sound like much, but adding the £50 bonus to their total annual return offers savers a chance to effectively leapfrog the best savings rates.

Alternatively, for those with sufficient savings in a rainy day pot safely held in cash who have have extra funds they will not need in the short term – they could take some risk and invest for higher returns instead.

For example, a simple tracker following the UK stock market, the Vanguard FTSE UK All Share fund, is up 15.7 per cent over 12 months, while HSBC’s FTSE All World Index global tracker fund is up 20 per cent over the past year.

A guide to how to start investing can be found here and for those who want to find out more This is Money’s DIY Investing section can help.