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Inflation hits 3% - is a base rate rise imminent?

Inflation hits 3% - is a base rate rise imminent?

Category: Savings
Author: Leanne Macardle
Date: 17/10/2017

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Inflation ramped up yet again last month, new figures from the ONS show, with the measure of CPI rising to 3% in September. This marks an increase from the rate of 2.9% recorded in August and means inflation has hit its highest level since 2012, which not only means that savers' cash is still being substantially eroded, but that a base rate rise may not be far off.

Savings rates rise…

There is some good news, however, with our latest figures revealing that savings rate rises have now outweighed cuts for nine consecutive months, with September seeing just 45 rate cuts compared with 121 rises, and some deals increased by as much as 1.30%. "Positive news is hard to come by in the savings market, but rate increases outweighing cuts for yet another month is exactly that," said Charlotte Nelson, finance expert at moneyfacts.co.uk.

"And where previously the rate increases were concentrated on the fixed rate market, September saw the start of an easy access revival as many providers made noticeable increases to their easy access accounts.

"For example, the average increase on easy access accounts stood at 0.34% in September; not only was this the largest increase seen in any category that month, but it was the largest increase easy access accounts have seen all year."

… but not enough

So far, so good – but it may not be enough. Unfortunately, rising inflation means that this may not be improving savers' fortunes to any extent, as although any rate rises are a step in the right direction, they're not rising far enough to protect savers' cash from being eroded.

After all, now that inflation has risen to 3%, you may not be surprised to find that still not one single standard savings account on the market pays a rate that will match or beat it, with even the best fixed rate bond – which comes from BLME and pays an expected profit rate of 2.55% – not able to come close.

"The reality of rising inflation is eroding the value of cash, which for most means negative interest rates," said Charlotte. This means that, even though savings rate increases are welcome news, savers are still losing out in real terms, which is why many will be hoping that heightened speculation of a rate rise comes to fruition.

Calls for a base rate rise strengthen

Such a high level of inflation is bad news for consumers, as it essentially means they're paying far more for everyday items than they were a year ago – which alongside poor wage growth means they could well be worse off. One of the key ways to tackle rising inflation is to hike up base rate, which means speculation of an imminent rise has now hit fever pitch.

The markets already appear to be expecting it, what with interest rate SWAPs having risen dramatically in the past month; this is causing speculation of an imminent base rate rise to intensify, said Charlotte, with markets and savings providers gearing up for the possibility of a rise as early as next month.

But how would this impact savings rates? As it stands, it's hard to tell, as Charlotte explains:

"The most active providers in the savings market are the newer banks, who are challenging traditional norms. It is difficult to tell how these new providers would react to a rate rise since they act almost as if they are in a bubble separate from the rest of the market, amending their products according to their funding requirements rather than wider market fluctuations.

"Another month of above target inflation will bring even more speculation to the market as to whether the Bank of England will raise the base rate. Unless savers have a crystal ball, however, it can be a confusing time to know what to do. The best possible option is to stay on top of the Best Buys and keep a little money aside ready to move if a good deal comes their way."

What next?

Compare easy access rates to keep your cash accessible should a rate rise lead to higher savings rates

Want more security? Opt for a fixed rate bond instead

Beat inflation with a high interest current account

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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