The Bank of England has lowered the base rate from 5% to 4.75%.
While experts will spend the coming days debating the fallout of the move, one thing’s clear: savers are likely to feel the hit.
But don’t panic.
A base rate cut may not be great news for savers, but it’s the perfect chance to review your finances and ensure your money is working as hard as possible.
Before we dive into how, it’s important as a saver to understand what the base rate is and why it matters.
The base rate, also sometimes known as the Bank Rate, is the interest rate that determines how much it costs banks to borrow money.
It’s set by the Bank of England’s Monetary Policy Committee (MPC), a mix of economists and other financial experts, whose main goal is to keep inflation at the government’s target of 2%.
The base rate is arguably one of the most important financial indicators because it influences the interest rates banks offer their customers for savings accounts, mortgages and loans.
Put simply, it’s the benchmark banks use to decide how much they charge us to borrow money and the rate they pay us on our savings.
When the base rate goes up, mortgages and loans usually get more expensive, but savers earn more interest. And when it goes down, borrowing gets cheaper but savings rates tend to drop.
One of the primary reasons for adjusting the base rate is to keep inflation within target.
With the consumer price index (CPI) measure of inflation unexpectedly dropping to 1.7% in September — below the 2% target and the lowest level in three years — the MPC has voted to cut rates.
The MPC hopes the cut will encourage people and businesses to spend and invest more. This will boost economic activity, help keep prices steady and avoid the risk of falling prices, which can hurt growth.
Simply put, a base rate cut is bad news for savers because banks typically reduce interest rates on savings accounts when the base rate falls, meaning you’ll earn less on your savings.
This makes it harder to keep your savings growing since fewer accounts will offer returns high enough to keep up with inflation.
But don’t worry — while it’s true that fewer accounts will match or beat inflation, there are options out there if you’re proactive.
One of the biggest pitfalls with saving is complacency. Savers often find a deal with a great introductory rate, then let their money sit there without checking for better options later.
But you don’t have to settle for low returns — even with a base rate cut.
Today’s news is actually the perfect nudge to shop around and find a better deal. Don’t forget to check out the newer, challenger banks, which often offer competitive rates to attract new customers.
As well as looking for top-paying deals, it’s also worth considering different types of accounts. An easy access account is a good idea as it means you’ll always be able to get hold of your money in case of an emergency.
However, if you expect more rate cuts ahead, locking your money into a fixed-rate or notice account could be a smart move. These accounts often offer higher rates, though they require you to keep your money locked in for a set period.
Interest rates change regularly with deals launching all the time. And keeping track of what’s new takes time and effort. It can sometimes feel like a full-time job.
That’s where a savings platform like Akoni can help. It lets you search and apply for the best rates seamlessly in one place, and then monitor your accounts to make sure you’re always getting the most out of your money.
Plus, you’ll get alerts about maturity dates, new launches and top-paying rates.
Ready to make managing your cash savings simpler with Akoni? Signup today.
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