Money experts have warned two thirds of savers could be hit hard by a crucial change to interest rates set by the Bank of England. The Bank of England Base Rate (BBR) is the interest rate at which the nation’s supreme financial institution pays commercial banks, building societies and financial institutions that hold money with the bank.

It is also the rate the Bank of England charge on loans made to all of the above. At the moment the rate is set at 3.75%. Higher interest rates equates to higher payments on many mortgages and loans, meaning people must spend more on them and less on other things. Saving becomes more attractive because the returns are higher and it becomes more expensive to take out a loan. These things all discourage consumers and businesses from spending.

When customers spend less, businesses are less willing or able to raise their prices. When prices don’t go up so quickly, inflation falls. Lower interest rates can have the reverse effect. If payments on mortgages and loans go down, people will have more money to spend on other things. Savers will get a smaller return and, therefore, may feel less motivated to put their money away. It will be also cheaper for potential borrowers to take out a loan – and use that money to make big purchases.

All of these factors encourage spending. When people spend more, this means demand is high. And when demand is high, businesses often raise their prices, pushing up inflation.

According to Moneyfactscompare.co.uk around two thirds (60%) of UK savings accounts fail to beat 3.75%, the BBR. Savings rates might hold out in the short-term, but they have been on the downward trend over recent months.

The Moneyfacts Average Savings Rate has fallen over the past 12 months. The rate was last above 4% in January 2024 (4.04%). This means, overall, savers could be losing money in real terms due to inflation, particularly if it rises in the months ahead.

Savers with the most flexible pots will be losing money in real terms right now, and this could worsen if inflation spikes due to prolonged unrest in the Middle East. A fixed rate deal can provide peace of mind and a guaranteed return in the short-term.

Year-on-year average rates across easy access and notice accounts have fallen, easy access rests below 3%. The average notice account and notice ISA rates are sub-4%.

Fixed rates have been on the downward trend over the past 12 months, one and five-year fixed bond and ISA rates sit below 4% on average. ISA season is breathing life into the market, as the average one and five-year fixed ISA rates are up since the start of March.

Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “Holding the Bank of England Base Rate may give savers a short respite, as providers could hold their ground until the future expectations of interest rates become clearer. Over the past couple of weeks, there have been more savings rate increases than reductions, most notably on one-year fixed rates, but the true benefit rests in the margins, so average rates are not moving much.

“The market needs stability and savers need to feel encouraged to build a nest egg. However, savers have been hit hard by cuts to the BBR, as less than half the market (40%) can now beat 3.75%.

“Many with the most flexible pots could well be losing money in real terms due to inflation. As caution over the future of interest rates continues, this could lead to fewer cuts to savings rates over the shorter-term, particularly fixed rate bonds or ISAs, as these take into consideration swap rate volatility.

“The ISA season will no doubt be shining a positive light on returns for the time being, in the run up to the tax-year end, so now is not the time for savers to be complacent. There are only a few weeks left to take advantage of the 2025/26 ISA allowance, where £20,000 can be shielded from tax, and this is ever more important due to fiscal drag.

“In April, the Personal Savings Allowance (PSA) will have been in force for a decade, yet the original allowances set in 2016 have never changed, despite higher interest rates.

“This means millions of savers will breach their limit, such as those becoming a higher-rate (40%) taxpayer will have to pay tax on any savings interest earned above £500. It is becoming increasingly vital for savers to seek advice on tax implications and how best to place their hard-earned cash to give them the best return.”

The prospect of an interest rate cut next month is a “genuinely open question”, the governor of the Bank of England has said. Andrew Bailey told MPs last month he will need to be confident he has seen “enough further evidence” before backing a further cut.

The central bank’s nine-strong Monetary Policy Committee (MPC) will vote on whether to maintain UK interest rates at 3.75% on March 19 or potentially reduce them. In their previous meeting earlier this month, the MPC voted by five-to-four in favour of keeping the rate at 3.75% despite a recent slowdown in inflation.

Mr Bailey, who has been the Bank’s governor since 2020, voted to maintain the base rate at the latest meeting and has been a decisive voter on numerous occasions over the past year.

When asked about the potential to vote in favour an interest rate cut in March, he said: “The question for me is whether I have I seen enough further evidence to feel that I’m confident to take that step.

“It’s a genuinely open question at the moment.”

The Bank governor also told MPs at Parliament’s treasury select committee meeting that inflation is expected to drop to the 2% target in the spring.

Consumer Prices Index (CPI) inflation was reported at 3% in January, dropping from 3.4% a month earlier.

Mr Bailey said: “We expect inflation to be there or thereabouts 2% in the spring and it is pretty much baked in given the things we know are coming through.”

Energy bill support announced in last November’s autumn budget is set to contribute to the expected drop in inflation.

However, Huw Pill, chief economist at the Bank, said the “disinflation process towards the 2% target is incomplete”.