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Written by: John Elmore
30/04/2021
The combined impact of low interest rates and increased inflation has the potential to hit savers particularly hard, so what strategies could you adopt to mitigate the damage?

Although it has been over a year now since the onset of COVID-19, the economic uncertainty caused by the virus persists worldwide.

In the UK, the virus has jeopardised peoples’ job security, with many being placed on furlough or made redundant. This in turn has strained household finances: almost two-fifths (38%) of adults have put their long-term savings plans on hold, according to a recent survey conducted by NerdWallet.

Certainly, COVID-19 has created an incredibly hostile environment for savers. For over twelve months now, interest rates have been held at historic lows of 0.1%, causing many to worry about the value of the savings. But now, inflation appears to be increasing, adding another layer to their financial anxiety. On 21st April, it was announced that inflation had risen to 0.7% throughout March, up 1% from the previous month. Now, experts are forecasting a further jump in April, with inflation rising to 1.7%, as lockdown measures ease, and individuals begin to spend more money on the high street.

This stable increase in inflation could be viewed positively. The cost of clothing and fuel returning to pre-pandemic levels might indicate that the UK is finally on the road to its post-pandemic recovery. In the same vein, low base rates have made borrowing cheaper, which in turn, has facilitated consumer spending and wider economic growth against a particularly volatile backdrop.

That said, many savers might suffer the consequences of the past year for quite some time.

How do interest rates and inflation affect my savings?

The combined impact of low interest rates and increased inflation has the potential to hit savers particularly hard.

Put simply, the lower interest rates are held, the more expensive it becomes for the banks to hold onto savers’ cash. Consequently, this means that Britons are less likely to receive a good return on their savings, which might scupper the chances of them achieving their savings goals.

Additionally, any increases in inflation – even small increases – can complicate matters further. By making the cost of living more expensive, individuals will see the purchasing power of their funds decline.

When put together, both of these factors mean that individuals will be faced with the prospect of their cash savings losing value in real terms. Undoubtedly, this will be unsettling for many savers, but that is not to say that there aren’t additional measures that individuals can take to protect their money in the difficult economy.

Safeguarding your savings

Given that interest rates are particularly low, investing cash in a traditional savings account might not seem like an inviting prospect to savers. However, there are still some accounts offering reasonably generous returns. At the moment, some instant access savings accounts are still offering up to 0.6% interest to savers, meanwhile several fixed rate accounts are offering up to 1.25%.

So, for those keen to maintain a traditional savings strategy, it would be worthwhile to search the market and use comparison websites to explore their options. These handy tools take out much of the hard work, presenting all of the selections in an easy to read, jargon-free format – allowing individuals to make their own mind up as to which option suits them best.

Another potential route for individuals under the current circumstances might be investments, or stocks and shares ISAs. These options are an alternative in the face of low interest rates and rising inflation, and offer the potential to make better returns than savings, if the investments perform well. However, savers should remember that whether they choose their own investments or opt for a portfolio manager to make investments on their behalf, that this can be a risky savings tactic and do not guarantee strong returns or even the safety of your original investment. They can also involve complex charges . As such, savers should ensure that they have an adequate capacity to take financial risks and seek financial advice before doing so.

Ultimately, rising inflation and low interest rates do not create the easiest market conditions for savers to grow their cash, and many might be concerned about their prospects to save for the future. That said, individuals would do well to remain calm, investigate all of their options, and seek counsel should they need to. In this way, even under difficult circumstances, savers should be able to stay on track.

John Elmore is Director for NerdWallet UK

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