Fixed-term savings rates start to drop – have we already reached 'peak' savings interest?

We’ve seen savings interest rates reach highs of over 5% over the past few weeks, but while average rates across the savings spectrum continue to rise, there are signs that some top rates may have peaked already.

Future increases to the Bank of England’s base rate (currently 3%) are expected to be less steep than previously, and providers are beginning to pull some of these high interest deals, particularly for fixed-rate products.

Here, we take a closer look at what's been happening to the savings market lately, and explore whether rates will continue to fall.

What's behind the savings rates changes?

Savings interest rates are partly tied to changes in the Bank of England (BOE) base rate. After a series of hikes seeking to reduce high inflation rates, the base rate is currently 3% – the highest since the 2008 financial crisis.

When the base rate is high, savers' deposits offer banks a cheaper source of borrowing than the BOE. This often leads to providers trying to entice new savers by raising their rates. This is what we've seen over the past couple of months, with new, market-leading savings accounts announced almost daily. 

At one point, experts had predicted the base rate could reach 6% in 2023. However, it's now thought that base rate increases will be more modest next year. 

As a result, savings providers are reviewing their market positions – particularly when it comes to fixed rates. These bonds were likely priced higher because of the prospect of steeper interest rate hikes in the coming months.

• Find out more: what could the Autumn Statement mean for your money?

Are fixed-term rates going down?

The table below compares the top rates for one to five-year fixed-term savings accounts on the release day of October's CPI inflation figures (which providers may use as an indication of what's likely to happen to the base rate), with top rates at the time of writing (24 November).

_{Source: Moneyfacts. Correct as of 24 November 2022, but rates are subject to change. *The accounts from Gatehouse Bank are Sharia-compliant, and so pay an expected profit rate (EPR) as opposed to an annual equivalent rate (AER).} 

As you can see, rates have fallen across all fixed terms. Whether they'll continue to fall remains to be seen, but savers may need to act fast if they want to take advantage of current top rates. 

Rachel Springall, finance expert at Moneyfacts, says savers who were holding out for top short-term fixed bonds to reach 5% and beyond are likely to be disappointed. 

'As it stands, providers are adjusting their pricing to maintain a prominent position in the market, but perhaps not have their rate priced far above their nearest competitor,' she says.

'In the weeks to come we could see further falls as providers adapt to a calmer sentiment surrounding future interest rates, so savers may well see deals pulled amid demand for a top return.'

• Find out more: How to find the best savings account

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Is this the end of 5% fixed-term deals?

It's still early days, and we don't yet know whether this is a trend that will continue in the coming months. 

Current interest rates for fixed-term bonds are far better than they have been over the past couple of years. Rates for fixed-term accounts between end of March 2020 and December 2021 hit a historic low of 0.1%. 

Even just a year ago, the best rate available for a two-year fixed-term account was 1.76%, while the highest rate for a five-year account last November was just 2.05%.

So, if you don't mind locking your cash away for a while, a fixed-term account can be a good way to make your savings pot grow – even though no rates currently come close to matching or beating inflation.

The next base rate review will be on 15 December, so things may change if it rises more steeply than expected. 

• Find out more: what to do if you're trapped in a fixed-term account

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Instant-access rates still on the rise

Unlike fixed-term savings accounts, the top interest rates for instant-access accounts and Isas are still increasing.

The best available rate for an instant-access savings account is currently 2.81% EPR from Al Rayan Bank – up from the top rate of 2.55% on 19 October.

Unlike fixed-term rates, these are variable and can change at any time, so it's a good idea to keep track of your interest rate. Your provider should get in touch to give you notice of any interest changes – and if rates do take a dip, you might need to switch elsewhere to make sure you're still getting a competitive rate.

• Find out more: how to switch your savings account