Savings rates best for two years

A desire among banks to attractive retail deposits has led to a dramatic increase in the interest available to savers, finds research from Defaqto.

Historically, when base rates are changed, savings rates followed suit - but under the circumstances of the current credit crunch those with spare cash and willing to move their money around can take advantage of the banks' and building societies' eagerness.

Last time the Bank of England's base rate was changed to five per cent it was 17 months ago in November 2006.

At this time the best rate of interest offered on a six-month bond for £10,000 was 5.27 per cent.

However, the Defaqto research finds this has now increased to 6.86 per cent – on a 6 month fixed rate bond offered by Icesave - some 1.59 per cent above levels seen just over two years ago.

The picture could get even rosier for savers if the Bank of England cuts interest rates again in the near future.

"With many people thinking the base rate is likely to fall further this year some of the fixed rate products available now look outstanding value," said David Black, principal consultant, banking at Defaqto.

"Variable saving rates look set to be reduced, but with some of the newer entrants, such as Kaupthing Edge & Icesave saying that they will hold their rates for the time being, people could still maintain or better their current rates going forward if they are prepared to move their money around," he explained.

On a longer five-year fixed rate bond the best interest rate available has increased from 5.58 per cent to six per cent since the Bank last cut rates in November 2006.

The best product offered in this sector is by the Anglo-Irish Bank.

"It is clear some financial institutions are making their decisions about fixed savings rates in the light of their own particular circumstances and are not being influenced too much by what is happening to the Bank of England base rate," continued Mr Black.

"While this is the case, savers can consider taking advantage of the situation by locking into some very attractive rates."

Defaqto, however, warns savers only balances of up to £35,000 with any one institution are covered by the Financial Services Compensation (FSA) Scheme.