Best buy 4.2% cash Isa as ‘good as it gets’ with rates set to fall

Victoria Scholar discusses rise in interest rates

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This boosts the arguments in favour of locking into a long-term fixed rate savings account while rates are still high, a savings expert has suggested.

The Bank of England has repeatedly hiked base rates from 0.1 percent in December 2021 to today’s 4.25 percent.

Despite that, rates on long-term fixed-rate cash Isas peaked in late October and have gone nowhere since.

Andrew Hagger, savings analyst at MoneyComms, said banks and building societies are holding back.

“They don’t want to commit to paying, say, five or six percent for several years as inflation and interest rates are likely to plummet over that period.”

The BoE is expected to increase base rates just once more to 4.50 percent, either in May or June. It could even start cutting bank rate by the end of this year, and definitely in 2024.

Bank rate will have dropped to three per cent by the end of next year, forecasters Capital Economics predicts.

Today’s fixed rate deals could be as “good as it gets” for cash Isa savers, said Laith Khalaf, head of investment analyst at AJ Bell suggests.

“With interest rates expected to peak soon, cash Isa rates are close to as good as they’re going to get for the foreseeable future.”

Savers who lock into a fixed rate today could getting an inflation-busting return by the end of the year.

Next year, the margin may be even wider.

In his Spring Budget, Chancellor Jeremy Hunt said consumer price inflation will fall to just 2.9 percent by the end of this year.

Philip Shaw, chief UK economist at Investec, has forecast an even bigger fall to just 1.6 percent.

Locking into a fixed-rate bond at four percent looks highly tempting as a result, particularly if you can tie up your money for three to five years, Khalaf said. “The market is expecting base rate to fall back to one percent over the next five years.”

The deadline for using this year’s tax-free Isa allowance is looming ever closer, at midnight on April 5.

Savers who do not use this year’s £20,000 allocation will have lost it for good.

Today, Darlington Building Society offers a best buy five-year fixed rate cash Isa paying 4.20 percent, Moneyfacts tables show.

It can be opened in branch or by post. 

United Trust Bank pays 4.05 percent but this can only be opened by post and the Isa deadline is looming.

Secure Trust Bank pays four percent, which can be opened online.

There is also a good choice of fixed-rate cash Isas for those who can only lock in for three years, with challenger banks Aldermore and Paragon both paying 4.15 percent a year.

Charter Savings Bank and UBL both pay a fixed rate of 4.01 per cent for one year.

One and three-year rates are only slightly below five-year rates, which is really unusual. Usually longer-term bonds pay more but this reflects market expectations of a sharp interest rate drop.

By next year, even three-year bonds could still be paying higher rates than inflation, if forecasters are correct in their predictions.

Second guessing interest rate movements is never easy as they are highly unpredictable, but a long-term fixed rate cash Isa could help savers get a positive real terms return, which doesn’t happen often.

It may be a chance worth taking, for those who can tie up money for the full term of the bond.

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