Brits desert NS&I to plough cash into savings accounts
The bank’s latest Money and Credit report found that £12.3bn was ploughed into cash savings accounts last month.
This follows a £6.6bn increase in deposits in September, and an average flow between March and June of £17.4bn a month.
Exodus from NS&I
The bank said the strong flow of deposits in October can be accounted for by deposits into instant access accounts, reflecting less investment in NS&I which cut interest rates on many of its accounts last week.
There was a small withdrawal (£0.5bn) from NS&I accounts in October compared with strong investments seen since March, including £5bn in September. The flow in to both deposits and NS&I accounts combined was a little over £11.5bn in September and October.
According to the Bank of England, the effective interest rate paid on individuals’ deposits increased by 7 basis points in October, to 0.53%. However, this remains 50 basis points lower than in February.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Cash started gushing out of NS&I in October, after brutal rate cuts were announced at the end of September. At the same time, more new money poured into savings, and as a result the easy access market has been inundated. Providers have cut rates again, so average rates are just 0.12% – a quarter of February’s average rate.
“NS&I pulled in £35.8bn during the crisis, so the £0.5bn withdrawn so far is a drop in the ocean. The floodgates really opened when the rate cuts actually came into effect. That’s when we saw significant uplift in transfers into active savings.”
According to research conducted on behalf of AJ Bell, more NS&I outflows could soon follow as 43% of NS&I savers say they intend to move their cash elsewhere.
Laith Khalaf, financial analyst at AJ Bell, said: “This could be the thin end of the wedge, seeing as the NS&I cuts have only just come into effect, so data from October is only going to show the activity of early movers.
“Indeed our consumer research suggests over 40% of NS&I customers intended to move their money elsewhere as a result of the dramatic reduction in rates on some of their most popular products. This could mean even more cash flowing into bank and building society accounts paying miserable rates of interest.”
The past few months have seen more money ploughed into savings due to the restraining effect Covid-19 restrictions are having on consumer spending.
People who have maintained their jobs and income find themselves with cash to spare, thanks to fewer opportunities to spend it on clothes, holidays, and nights out. Households have now saved more than £100bn into cash accounts since March.
Khalaf said: “The rotten irony is this bumper flow of cash is going into deposit accounts just when interest rates sit at record lows. In such uncertain times it makes sense for savers to build up an emergency cash buffer, though the risk is that inflation eats away at the value of their nest egg. Instant access accounts are now paying just 0.12% interest on average, below CPI inflation, which currently sits at 0.7%, and is expected to rise throughout next year.
“Savers should therefore try to make the most of their cash by seeking out the best rates on the market, and considering locking some cash away for a bit longer in fixed term accounts, to bump up the interest they are receiving. Letting cash simply build up in a bog standard current account is likely to mean that money is losing its value once inflation is taken into account.”
Paying off debts
The Bank of England report also showed that consumer credit was down another £0.6bn in October, driven by credit card repayments. Since the beginning of March, households have repaid £15.6bn of consumer credit.
The average credit card interest rate stood at 17.96% in October. The average interest on overdrafts was 19.7% – before the new rules came into effect in March it was 10.32%.
Mortgage borrowing was up £4.3bn (it was £4.9bn in September and the average in the six months before the crisis was £3.9bn).