You are here: Home - Saving & Banking - News -

Mixed news for savers as rates rise but inflation bites

Written by:
It’s the news savers have been waiting for; rate rises on cash accounts have finally overtaken reductions after 15 consecutive months of cuts. However, rising inflation is dulling any celebrations.
Mixed news for savers as rates rise but inflation bites

According to data firm Moneyfacts, there were a surprising 67 savings rate rises versus 53 reductions in January.

And in other positive news, new deals launched by providers since the start of the year have outweighed withdrawals by 49 to 31.

However, official figures released today (Tuesday) show inflation rose for a third month in a row in January to 1.8%, its highest level since June 2014.

And its upward trajectory is expected to continue.

The Bank of England (BoE) forecasts inflation to hit its 2% target in February and peak at 2.8% in early 2018.

Andrew Sentance, senior economic adviser at PWC and former BoE Monetary Policy Committee member, has gone further, predicting inflation will “likely to be around 3% and possibly even higher” by the end of the year.

Rising inflation is bad news for savings as it erodes the value of the money held in the bank.

To counteract the effects of inflation, savers need to be earning interest greater than the rate of inflation.

‘Very few accounts beat inflation’

Unfortunately, Moneyfacts data shows there are very few accounts to choose from that match or beat inflation, due to the low rates on offer.

Only 23 of the 697 savings accounts on the market pay 1.8% or more and all of them require savers to tie their money up for at least four years.


“Most of the new deals that have surfaced this year pay rates that are below the current level of inflation, but they can still earn a position among the best accounts, showing that providers don’t need to work very hard to maintain a competitive position in the best buys,” said Rachel Springall, finance expert at Moneyfacts.

Springall said the lack of competition in the savings markets has allowed brands such as National Savings & Investments (NS&I) to creep up the best buy lists, which has led to “inevitable” rate cuts, which will hit millions of savers.

NS&I announced last week it was slashing rates on four of its top-paying accounts and cutting premium bond prizes from May.

Alternative options for savers

Until competition heats up, the product savers may want to consider is the NS&I Investment Guaranteed Growth Bond, a market leading three-year savings bond paying 2.2% for people 16 and over. However, the maximum deposit is £3,000.

Another option is high interest paying current accounts. But these often have strict eligibility criteria. Nationwide FlexDirect pays 5% on balances up to £2,500 for the first 12 months but you have to pay in a minimum of £1,000 a month.

Tesco Bank’s new current account guarantees 3% interest on balances up to £3,000 for two years – but the supermarket halted applications this week following unprecedented demand.

There’s also the riskier investment route for savers who do not need access to their cash in the short-term.

Figures from investment firm Fidelity show £15,000 deposited in the average savings account 20 years ago would be worth around £20,000. The same amount invested in the FTSE All Share index would be worth around £53,000 today.

Savers moving up the risk spectrum into investing need to be comfortable with the fact that the value of their money could go up or down.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Coronavirus and your finances: what help can you get?

News and updates on everything to do with coronavirus and your personal finances.

Everything you need to know about being furloughed

If you’ve been ‘furloughed’ by your company, here’s what it means…

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Barclays launches £2,500 cashback mortgage deal for first-time buyers

Barclays has introduced a cashback mortgage for fledgling buyers targeted to cover stamp duty fees for properties worth up to...