The interest rate on all three savings products will increase to 0.35% on 29 December 2021.

Currently the interest rate on Direct Saver and Income Bonds is 0.15% gross/AER, and the rate on the Direct ISA is 0.10% AER.

NS&I said it was increasing the interest rates on these products in order to help it meet its annual ‘net financing’ target.

NS&I’s net financing target for 2021-22 is £6bn, in a range of £3bn to £9bn. In October this year, NS&I published its year-to-date total net financing performance of £0.6bn.

NS&I slashed the interest rates it pays on a raft of savings accounts in November 2020.The interest rate on its Direct Saver, a previous best buy, was reduced from 1% to 0.15%, while the rate on Income Bonds fell from 1.16% to 0.01%.

The rate cuts came as a surprise when they were announced and a blow to savers who ploughed money into NS&I since the pandemic began.

The NS&I rate rises come nearly a week after the Bank of England raised the base rate on interest from 0.1% to 0.25%.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “NS&I is raising its sights to bag more savers and avoid undershooting its fundraising target for the second consecutive year. However, these new rates are still only around half as rewarding as the most competitive on the market, so for most savers, there’s a risk they’ll miss the mark.

“At 0.35%, these rates are still far from market-leading. You can currently get up to 0.71% on easy access savings and 0.67% on an easy access cash ISA, so you’re sacrificing almost half of the potential interest in order to gain the benefits of the NS&I brand.

“There are those who feel safer with NS&I, especially as your money is 100% protected by the Treasury. However, given that the first £85,000 held with any institution is protected by the Financial Services Compensation Scheme, there is little to be gained unless you have a really significant balance.”