Is the Big Interest Rate Con Coming Again?
Published / Last Updated on 26/09/2025
14 years ago, we shot the first publication of “The Big Interest Rate Con” when interest rates were sitting at between 3 and 4% pa and we suggest we are approaching similar interest rate levels, hence a review and update of this issue.
In recent years, after the pandemic when we suggested governments would stimulate inflation for a period of 5-10 years to devalue massive public sector borrowing to devalue public sector over 10 to 20 years. Add to this Russia/Ukraine and the energy crisis pushing fuel bills up with the knock on effect on our costs of living for fuel, transport, food and most goods and services. US tariffs have also added to this resulting in stubborn inflation in UK, US and Europe, interest rates have been cut but still remain historically higher.
Interest rates were held by the Bank of England in September after the following changes:
- August 2023 – 5.25% pa
- July 2024 – 5.0% pa
- November 2024 – 4.75% pa
- February 2025 – 4.50% pa
- May 2025 – 4.25% pa
- August 2025 – 4.00% pa
- September 2025 – interest rates held at 4.00% pa.
We expect interest rate to be cut again into the 3 to 3.75% band by the end of the year and this take us back to 2014 levels.
Inflation to be Higher than Cash Savings Rates?
We suggest when interest rates are cut again, it may mean that with inflation currently at 3.8% pa and forecast to fall to just 3.5% pa by the end of year 2025, cash deposit savings rates are not going to look that attractive if the Bank of England base rate is 3.75% pa. This may mean annual savings on bank deposit rates may drop to 3.0% pa to 3.25% pa and with inflation at 3.5% pa, your money will be devaluing if you hold in cash.
You need to be careful of the terms offered on savings; you need to read the small print. Interest rates on savings may be offered. You need to check when interest is added on Lump Sum/Cash Deposits:
Headline Grabbing Rate of 5% pa on Existing Cash Deposits:
- Yearly Accrual: This means interest is added at the end of the year is good provided you hold for the full year but allow for inflation at 3.5% pa, meaning a real growth return of 1.5% pa.
- Monthly Accrual: This means interest at 5% divided by is added each month, which is better provided you hold for complete months, so if you hold for 6 months only, you get at least 2.5% return.
- Daily Accrual: This means interest at 5% divided 365 days is added each day, which is even better meaning at whatever point you withdraw your funds, you have had the equivalent of 5% pa.
The Big Interest Rate Con on Regular Cash Savings Schemes
We have seen it many times before and we will see this again. If you see a headline rate of 5% pa for a scheme that you must save a monthly amount in e.g.:
- £100 pm for 12 months, know that you will not get a return of 5% at the end of the year, you may get a real return of just 2.75% if interest is only added at the end of each month, which is massively below current inflation rates.
|
Balance at Start Month |
Monthly Investment |
Balance End Month: Headline Annual Rate 5.00% |
|
|
Month |
with Interest Added |
Equivalent Monthly Rate 0.4167% |
|
|
1 |
£0.00 |
£100 |
|
|
2 |
£100.42 |
£100 |
£200.42 |
|
3 |
£201.25 |
£100 |
£301.25 |
|
4 |
£302.51 |
£100 |
£402.51 |
|
5 |
£404.18 |
£100 |
£504.18 |
|
6 |
£506.29 |
£100 |
£606.29 |
|
7 |
£608.81 |
£100 |
£708.81 |
|
8 |
£711.77 |
£100 |
£811.77 |
|
9 |
£815.15 |
£100 |
£915.15 |
|
10 |
£918.96 |
£100 |
£1,018.96 |
|
11 |
£1,023.21 |
£100 |
£1,123.21 |
|
12 |
£1,127.89 |
£100 |
£1,227.89 |
|
Invested |
|
£1,200 |
£1,233.00 |
|
|
Profit £33.00 after final interest added. A real return of 2.75%. |
This is the big interest rate con.
