Best Savings Interest Rates

Like many of you, I rarely paid much attention to interest rates and years ago I would have been hard pressed to tell you which accounts offered the best savings interest rates, or indeed what some of these rates actually meant. After all as a spender the only rate that I was often aware of was that charged on my credit card or store card. As a saver ( and investor and trader in the markets), it is a very different story - I am acutely aware of any changes in interest rates, both because they affect the markets I trade, but more importantly the return on my savings. If someone offers a better deal, then I will move my money fast. The savings market makes it's money from our inertia, as it takes effort on our part to open a new account, or to move money from A to B. The market is fully aware of this, ( much like the banking industry), and it is used all the time - lure us in with an attractive but expiring offer, then hope we stay ( which most of us do!). So looking at it historically, where are rates likely to go in the future, and how are rates calculated ?- let's take a look.

Best Savings Account Rates - History of Interest Rates

Historically, interest rates around the world are at an all time low, which is not good for us as savers! Japan leads the way with rates having been as low as zero, and currently only 0.5%, great for borrowing, but not good for your savings. America has recently cut its rates to 2%, with Canada at 3% and the UK at 5%. The best savings interest rates are currently New Zealand at 8.25%, India at 7.75% , China at 7.47% and Australia at 7.25%.

In order to make the point I have reproduced a chart below which shows an average of G7 rates since 1945 - as we can see, interest rates around the developed world are at their lowest rates since the second world war. For those of you as old as me, you will no doubt remember when interest rates on mortgages were 17% in the UK - a painful time, but again great for saving, so it is always a double edged sword. If you have savings and a mortgage, then an offset mortgage could be a good way to reduce your outgoings and pay off your mortgage more quickly - if you would like details of these, please just follow the link here - best mortgage deals. It would seem from the above that low savings rates are here to stay for some time, so finding the best savings rates is even more important. Many of the G7 economies currently have both inflation and a stagnation in economic growth, often referred to as stagflation. The problem for central banks and governments is that increasing rates drives the economy deeper into recession, whilst lowering rates further, increases inflationary pressure. So it's a lose/lose situation. In my view these rates will continue at historically low levels for the next 3 to 4 years, so as savers we need to get used to them !!

Best Savings Interest - Who Sets Rates?

Like me, you were probably brought up on the belief that when an interest rate announcement was made by a Government or Central Bank, then almost immediately our mortgage lenders and savings providers would issue new borrowing and lending rates. In today's world this is no longer the case, as we now have two rates to consider.  The first rate, the BOE rate is set by the Bank of England. It is the one that is announced at the monthly BOE monetary policy meeting, generally at noon on a Thursday. It is the rate that gets the headlines in the news, and is eagerly awaited by the financial markets around the world, and it used to be the one that governed your mortgage interest rates. If the bank cuts interest rates, then the mortgage lenders and savings rates would follow suit - not any more. Why - because the banks no longer trust one another following the sub prime crisis which has swept the financial markets around the world. So what governs the savings rates at the moment? - it is called the LIBOR rate.

The BBA LIBOR ( London Interbank Offered Rate)  dictates the interest rates at which the banks lend to one another, and is released at 11.00 am every day. If there is plenty of money in the system, then rates will be in line with the BOE rate, if not, then LIBOR and the BOE rates diverge. At the moment we have a situation where money is in short supply, so the published BOE rate of 5% is approximately 1% to 1.5% lower than the rate at which the banks are willing to lend to one another. Good news if your are looking for the best savings rates, not so good for borrowers. Each week the BOE holds an auction of money for the following week - in the last few weeks these auctions have been over subscribed three times. In other words money is in very short supply which has two effects.

Firstly for savers, this is good news as this forces savings interest rates higher, so you will get much better savings rates, and secondly the banks will be keen to get cash into their deposit accounts, and will therefore offer more attractive rates to do so - so a win/win for savings at the moment! Money like anything else is a commodity. If it is in short supply then the banks can make more money by charging each other higher rates, which then feeds into the market with higher interest rates (both as a borrower and saver) . Conversely if there is plenty of money available then lower rates will follow which will then bring the LIBOR rate more closely in line with the BOE rate, and a more familiar situation where a BOE rate change is immediately reflected in our mortgage and savings rates.

Until confidence returns to the market, which could take a couple of years, I would suggest that you make the most of the best savings interest rates available as this situation will not continue for ever.  Now that we understand a little of how rates arise, let's take a look at how interest is calculated on our savings, starting with the simplest of all, simple interest.

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