Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

For the past year UK interest rates have exceeded inflation, meaning cash savers have been able to get a return which has run ahead of price rises.

That marks a reverse from the position that has been in place for most of the past 16 years, during which time inflation has exceeded interest rates and savers have seen their money lose value in real terms.

By common consensus, interest rates have now peaked and are on their way down. How far and how fast they fall is uncertain - but there are ways to ascertain what financial markets are telling us about the path forward for interest rates.

What rates can savers get now and what does the future hold for cash savings interest?

5% and beating inflation - but for how long?

The best cash savings accounts right now pay 5% - but only just. After recent cuts to best-buy rates, only one easy-access account available at time of writing pays 5%, with a slew of rivals offering interest just below that level.

The good news is that this means the most competitive accounts easily beat the current rate of inflation, which came it at 2.2% in August.

The chart below shows how interest rates set by the Bank of England have compared to inflation since the 1980s. The rates available on cash accounts aren’t the same as the Bank of England Rate, but they are related.

The Bank of England rate has actually exceeded inflation since October 2023, but the gap widened this year as inflation fell. You can see the trend on the chart below. It returns us to a position that has been unfamiliar for more than 16 years, notwithstanding a very brief period in 2015 when inflation threatened to turn negative.

If you look closely, however, you can also see that the paths for inflation and rates have turned in the past few months. That looks set to continue, with the Bank forecast to apply one more rate cut this year while inflation is expected to rise to 2.5% before dropping again next year.

Where markets expect rates to go next

The prices of assets which pay a fixed income, such as government bonds, can be used to work out where the market expects interest rates will be in the future.

Right now the bond market is suggesting that the Bank Rate will fall from its current level of 5% to 3.96% in 18 months’ time. This is purely indicative - the reality is that the Bank of England tends to move rates in 0.25 percentage point increments.

The chart below shows the path for interest rates implied by bond market prices. The three lines each show the path implied on different days over the past few weeks. Expectations for where rates will land had been moving downwards - shown in the difference between the red line from 4 September and the blue line from 17 September - but just recently have ticked slightly higher - shown by the yellow line.

Nonetheless, rates are still expected to have fallen to around 4% by the end of next year, with a likelihood that savings rates also track lower in that time.

Is cash still the best place for your money?

Inflation-beating interest on cash will no doubt have tempted some to move money from investments into savings accounts. The good news for those savers is that rates are likely to exceed inflation for a while longer. Market prices suggest this will be the case for all of next year, at least.

But there’s also clear signs that the inflation-adjusted returns from cash are falling. In that context, is it time to rebalance your allocation of cash versus investments?

Cash and investments both play an important - and different - role - in your financial mix. It makes sense to hold a sum of cash that you can dip into in an emergency - an amount worth three to six months of income is sometimes recommended. This actually helps your investing because it means you won’t have to sell investments to produce cash in a pinch.

Beyond that, it can also make sense to hold cash on the sidelines that you are willing to use to take advantage of investment buying opportunities as they arise. Cash will not lose value in nominal terms (although it can lose value to inflation) whereas investments can fall in value.

The compensation for taking that risk is the potential that investments can produce a higher return - with the chance, of course, that they don’t. In point of fact, the Legal & General Global Equity Index Fund, a low-cost fund from our Select 50 which reproduces the performance of global stock markets, would have significantly outperformed cash over the past year, adding 19.1%1. Please remember past performance is not a reliable indicator of future returns.

If you need the potentially higher returns available from investments to make your financial plans work in the long term, loading up on cash, even if rates are beating inflation, may mean you fall short of hitting your goals. It might have made sense in the past year, when many investors will have been happy to snap up a healthy real-terms return with no risk of loss. Now rates are falling it could be a good time to reassess your balance of cash and investments.

A half-way solution might be to move cash savings to an investment account but utilise assets which produce a cash-like return while rates remain somewhat attractive. That would allow you to take advantage of the real return from cash while it lasts, but also leave you ready to switch to investments if and when that suits you.

Cash funds or money market funds held inside investment accounts can do this job. The Fidelity Cash fund is the best-selling cash fund on the Fidelity Investing platform and is set to produce 5.16% of income in the coming year - or 4.81% after deducting the Fidelity platform charge of 0.35%.2 Please note this yield is not guaranteed.

You can also earn interest on money held in your investment account even if you don’t invest it into a cash fund. Fidelity offers interest on cash and you can learn more about how we manage your cash here.

(%)
As at 30 Sept
2019-2020 2020-2021 2021-2022 2022-2023 2023-2024
Legal & General Global Equity Index Fund 5.5 23.5 -2.9 11.0 19.1

Past performance is not a reliable indicator of future returns.
Source: Morningstar from 30.9.19 to 30.9.24. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Source:

1 Fidelity International, as at 30 September 2024
2  Fidelity International, 6 October 2024. The Distribution Yield is calculated by totalling the interest expected to be paid over the next 12 months by the bonds currently held in the fund, then dividing by the value of the fund. This distribution yield datapoint is sourced from Broadridge.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Eligibility to invest in a ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. Select 50 is not a personal recommendation to buy or sell a fund. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of a sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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