New banks are now offering interest rates of around 2%, levels that have not been reached for the past two years. These accounts are aimed at people who are willing to manage their accounts by post, internet or phone.
United Trust has increased their interest rate from 1.9% to 2.05%. A one year fixed rate bond is now being offered with interest rates of 1.95% by Kent Reliance. Charter Savings have also recently released a new rate of 2% and there is a two year bond being offered by Paragon Bank that offers a rate of 2.2%.
All this has happened in spite of the fact that the Bank of England is not expected to raise interest rates until May next year. They have remained at an all time low for the last six years. However there have been rises in the rates of the wholesale market that banks use to trade money between themselves.
Markets are now expecting the base rate of interest to rise in May as opposed to August as was previously predicted. This means that they are raising their interest rates in advance in order to lure customers into banking with them.
As unemployment rates are falling and rises in pay are going up, alongside a slight increase in inflation, the economy is now seen to be doing a lot better than in previous years. Market analysts are still keen to state that just because the base rate will rise does not mean that it will shoot up overnight. It will probably take around three years for interest rates to get up to around 3%, this means that it will be a while until the public benefits directly from this increase.
Paul Hollingsworth stated:
“We are a year away from the first rate rise. When it does start to go up, it will be just 0.25 percentage points every six months until it reaches 3 per cent.”
Alasdair Cavalla went on to say:
‘We expect base rate will be kept on hold until at least the first quarter of next year.’
There also a clear difference between the behaviour of newer banks and the action of the bigger, older ones. This is because the larger banks are in no position to be wanting to attract savings. They have a wealth of cheap capital at their disposal due to the amount of money that they were lent by the government. They are also looking to lend less which means they have more than enough money to suit their needs at the moment. Newer banks on the other hand are experiencing rapid levels of growth and are therefore looking to accumulate capital to support this movement.
Paul Whitlock of Charter Savings Bank says:
‘We passed the recent rise in rates in the market on to savers. Big banks that do not want to attract new savers leave rates unchanged to benefit themselves rather than customers.’