During the ongoing cost-of-living crisis, being able to save for a rainy day can go a long way in putting your mind at ease when thinking about the future.

From fixed term deposit accounts to ISAs, there’s a host of savings products to choose from. For many, simply finding the best rate will be a priority, but others will want to dig a bit deeper and understand what sets the rates, and why they can vary so widely.

1) Why are savings rates not rising at the same rate as the base rate?

Inflation in the UK reached its highest rate in 40 years, prompted by the effects of the pandemic and the war in Ukraine. Labour shortages, disrupted supply chains and rising energy prices have all increased the costs of goods and services, pushing up prices for consumers. In a bid to combat rising prices, the Bank of England leaned on its core mechanism to tackle inflation – raising its base rate.

However, inflation has remained persistent, and experts – including consultancy Capital Economics – are predicting that the base rate may rise to 5.5% by the end of 2023. This has prompted banks and building societies to raise the rates on their own products, including home finance and savings to ensure their products remain attractive to consumers.

However, while businesses need to offer rates that can entice customers to bank with them, they also need to ensure the long-term viability of their business. So, just as banks will need to raise home finance rates to ensure they can provide finance responsibly, savings rates may sit lower than the base rate to ensure the business can continue to operate responsibly and provide its products.

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2) Why do some short-term deals offer higher rates than long-term deals?

Market uncertainty plays a key role in banks setting rates, which is why some short-term savings products are now offering an equivalent, or in some cases, more favourable, rate than long-term solutions.

The yield curve is a dataset which predicts rates over a short- and long-term, reflecting market activity, sentiment and the base rate. It’s a strong indicator for rates on savings products, but traditionally short-term rates are lower, as this reflects the certainty with which you can predict market trends.

However, due to the volatility caused by the current economic conditions, the market’s yield curve is currently inverted – this means short-term rates are now at a premium. With the UK forecasted by the Organisation for Economic Co-operation and Development (OECD) to have the highest levels of inflation out of any G20 economy, this trend looks like it’s set to continue moving forward.

3) Why are savings rates not rising at the same pace across all products?

The economic climate influences product pricing. The yield curve is currently expecting more inflation, therefore, there is uncertainty across longer-term tenures. This is why shorter-term products are out-pricing longer term.

Providers have a duty to offer products which are fair to savers and homebuyers. Challenger banks often need to find a fair balance between savings rates and home finance rates, which is more challenging in the current economic environment. This balance ultimately allows challenger banks to be more sustainable and ensure their viability.

4) Shariah-compliant expected profit rate

As a Shariah-compliant bank, Gatehouse Bank doesn’t offer interest rates because it operates according to Shariah principles. Instead, our customers receive an expected profit rate and the money in their savings accounts is put to good use through trade in Shariah-compliant investments to earn a profit. The base rate determines the benchmark for the market and allows Shariah-compliant banks to offer rates within a conventional market whilst upholding the market integrity.

As an ethical bank, we constantly look at how our proposition impacts society and the environment. Our Woodland Saver accounts offer customers the opportunity to achieve competitive returns while supporting the environment by planting a tree on behalf of the customer for every account opened or renewed.

In these tough times, putting money aside to save for the future can be challenging. However, there are also opportunities for savers to grasp as the high rate environment we are currently in allows consumers to grow their rainy day fund and secure their finances for the future.

Ravi Kumar is senior product manager at Gatehouse Bank