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Understanding savings interest rates

Interest rates are an important factor when choosing a savings account. They can seem confusing at first, but once you understand a few key terms, they’re straightforward. Knowing how they work can help you make the most of your savings.

Published:31 March 2026

Topics:
Savings guides

What are interest rates?

An interest rate is the money you earn for keeping your savings in an account. For example, if you save £1,000 in an account paying 4%, you’ll get £40 over a year.

There are two main types of interest rates:

  • variable rates – these can move up or downvariable rates – these can move up or down
  • fixed rates – these stay the same for a set periodfixed rates – these stay the same for a set period

Most savings options should make it clear whether the rate is fixed or variable. Knowing which one to choose depends on your own circumstances and whether you prefer the guarantee of a fixed rate, or the easy access of a variable rate.

What is the base rate?

The Bank of England Base Rate is the UK’s main interest rate. Banks monitor it closely, and changes to the base rate will influence the rates they offer.

Here’s a summary:

  • when the base rate rises, savings rates may rise too when the base rate rises, savings rates may rise too
  • when the base rate falls, savings rates may drop when the base rate falls, savings rates may drop

It doesn’t always happen straight away, and each bank might react differently, but the base rate sets the overall direction.

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Why savings rates change

Savings interest rates move for lots of reasons. A lot of them are linked to what’s happening in the economy. 

Inflation

Inflation is the rate at which everyday prices rise. Higher inflation can push savings rates up, while lower inflation can bring them down. The goal for banks is to help your money keep its value, even if other everyday costs are going up.

The wider economy

If the economy is growing, interest rates may rise to keep things balanced. If the economy slows down, rates may fall to encourage people to spend or save.

Competition between banks

Banks review each other’s rates. They adjust what they offer to stay competitive, considering things like AER (Annual Equivalent Rate), flexibility, and whether a rate is fixed or variable.

Saving and spending habits

Sometimes rates change because people are saving more or less. Banks may adjust rates or introduce new accounts to help manage demand.

How rate changes affect your savings

Interest rate changes can impact how your savings grow: 

  • if rates go up, you may earn more on accounts with variable ratesif rates go up, you may earn more on accounts with variable rates
  • if rates go down, fixed rate accounts can feel reassuring because you already know what you’ll earn, even if the market dipsif rates go down, fixed rate accounts can feel reassuring because you already know what you’ll earn, even if the market dips
  • if rates stay the same, it can be a good time to think about whether you want more flexibility or the certainty of a fixed rateif rates stay the same, it can be a good time to think about whether you want more flexibility or the certainty of a fixed rate

Many people choose a mix of accounts so they have savings they can access when they need to and savings they leave to grow over time.

To find out more about common terms banks use and brush up your savings knowledge, take a look at our jargon buster.