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.

In a bid to curb inflation, the Bank of England has significantly hiked up interest rates over the past two years or so. The interest rate now sits at 5.25% (which it has done for the past five consecutive announcements). It’s been particularly bad news for mortgage holders and borrowers. However, it’s been great news for cash savers - but what’s the outlook for cash this year?

When will interest rates fall?

This is the big question. And it’s one that we’re keeping close tabs on. Our guide about interest rates is updated each week or as markets move. Please bookmark the page or sign up to our Pulse emails for the latest.

It’s hard to know exactly when they’ll fall but following the latest interest rate announcement (where the Bank of England held rates at 5.25% for the fifth time running - voted by a majority of 8-1 to keep interest rates unchanged), Ed Monk, associate director at Fidelity International, said the following.

Choosing when to cut rates is like trying to catch a falling knife - moving either too early or too late is likely to be painful. The hawkish tone from the Bank of England in keeping rates on hold will disappoint households, investors, and the government. All could do with some relief from higher borrowing costs, but the Bank’s words today indicate it may be some months before it agrees.

What are yield curves and why do they matter?

The yields available on bonds of different lengths of maturity - and the difference between those yields - can tell us where markets expect interest rates to head in the future. When plotted on a chart, these produce a ‘yield curve’. The Bank of England estimates two yield curves for the UK on a daily basis. One is based on yields on UK government bonds and takes implied UK inflation into account. And the other is based on sterling overnight interest rates.

If that sounds complicated, don’t worry. For most people, all you need to know is what the yield curve tells us about rates. According to the latest yield curves, rates will fall to 5.14% in June and then reach 4.92%1 by the end of 2024. This means that for the coming year market interest rates will remain high and cash savings accounts may well continue to beat inflation (which they only started to do from October 2023, when the headline consumer price index inflation rate dropped to 4.6%). It is worth remembering, however, that savings account rates are set by the providers of those accounts - there’s no guarantee that the rates they pay will match the Bank of England rate.

The bigger picture - shares, bonds and cash

Saving in cash means you don’t risk investment losses. But for those ready and willing to take a higher level of risk, with assets such as shares and bonds, it can also mean missing out on potentially higher returns (of course, there are no guarantees).

If you take a look at the chart below, you can see that shares and bonds - over a 24 year period - have done better than cash / cash equivalents. Of course, this example is for illustrative purposes only. In reality investments go up and down and charges apply. And please note that past performance is not a reliable indicator of future returns.

Source: Refinitiv, MSCI World Index, FTSE Government Bond Index and US Treasury Bills, total returns from 31.12.98 to 31.12.23. *US Treasury bills have been used as a proxy for cash.

With the outlook seemingly positive for the immediate future, what options do cash savers have?

Even though investing your money in the long run gives it a better chance to grow and outpace inflation, cash definitely has a role to play in your portfolio. It’s there to use for emergencies. It’s also good to have some spare to take advantage of any investment opportunities. And it good to use as a buffer, so that you’re not forced to sell investments and lock in losses.

The good news for savers right now is that high interest rates provide them with plenty of opportunity to get a reasonable rate of return for a comparatively low risk. Here are some options to think about.

Putting money in a bank - For now, at least, it’s still possible to get competitive saving account rates. At time of writing the Post Office’s easy-access savings account offers 5.06%, while you can get 5.2% with Secure Trust Bank if you’re prepared to lock it away for six months.2 The advantage of depositing money in the bank is that these rates are guaranteed, although they tend to come with conditions.

Premium Bonds - Premium Bonds don’t earn interest. Instead, there’s an annual prize fund rate that funds a monthly prize draw for tax-free prizes. The rate is variable so it can change up or down, such as when the Bank of England base rate changes or when rates in the general savings market change. The odds of winning are 21,000 to 1 for every £1 Bond in the monthly prize draw. The annual prize fund rate is currently 4.40% (variable) and you don’t pay any tax on the prizes. The minimum to pay into it is £25 and the maximum is £50,000.3

Cash / money market funds - If you invest in a cash fund in an ISA your gains and income are tax-free, while a SIPP comes with significant tax benefits. Thanks to high interest rates, cash funds have proved popular with both ISA and SIPP investors on our platform both last year and this. As I write, the most popular cash fund has been the Fidelity Cash Fund and this has a distribution yield of 4.97%.

If you’d like to know more, here's a list of the cash and money market funds that we hold on our platform (as at February 2024). The accumulation funds are listed below, but note we also have Income versions for many of these funds. View our Investment Finder for the latest funds.

Fidelity offers interest on cash - some customers are surprised to learn that we’ve been paying interest since 1 July 2022. Our first payment covered July 2022 to June 2023 in one annual payment. Now, interest is paid the month after it has been earned - so, for example, interest relating to March will be paid in April. Here’s what we offer currently. You can learn more about how we manage your cash here.

Account Gross rate of annual interest Annual Equivalent Rate (AER)
ISA (including Junior ISA) 3.45% 3.51%
Investment Account 3.45% 3.51%
Cash Management Account 3.45% 3.51%
SIPP (including Junior SIPP) 3.65% 3.71%

Please note interest rates can be changed at any time. The rates above have been applied since 1 January 2024.

Source:

1 Fidelity International, 28.3.24
2 MoneySavingExpert, 2.4.24
3 NS&I, 3.4.24

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity's money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. The value of shares may be adversely affected by insolvency or other financial difficulties affecting any institution in which the Fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Select 50 is not a personal recommendation to buy or sell a fund. 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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