Savers can make hay while banks roast

One year ago, interest rates on savings accounts were closely clustered around the Bank of England (BoE) base rate.

But despite three successive rate cuts, savers can now get more bangs for their bucks than they could 12 months earlier.

However, savers need to tread carefully. Abnormally high interest rates may be a sign that banks are desperate for cash that they cannot easily get elsewhere - even from other banks.

In May 2007, when the BoE base rate stood at 5.5%, Icesave was offering the top savings rate on the market. Its Internet account paid a tad more than the base rate. At 5.70%, it even beat its own Easy Access account at 5.56%, and Anglo Irish Bank's No Notice Account that paid 5.65%.

But the best savings rates are now more than 1% higher than the BoE base rate. Kaupthing Edge is paying 6.31%, and Heritable Bank is offering 6.06% on its Easy Access ISA.

David Kuo, Head of Personal Finance at Fool.co.uk, says: "The savings market has gone bananas, but it's ripe for savers. They can now earn attractive rates of interest on a bunch of deposits - more than it theoretically costs banks to borrow from each other. It's a bizarre state of affairs.

"However, savers need to beware because if something looks too good to be true then there may be a catch. The general rule of thumb is that the higher the rate of return, then the greater is the risk. So, use best-buy tables with care. They will only tell you where you will earn the best rate of interest.

"The crazy situation is likely to persist as long as the credit crunch lasts, and savers should try to make as much hay while banks roast. But, keep your savings within the Financial Services Compensation Scheme limit of £35,000 if you don't want to risk getting your fingers burnt."