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Inflation rises as savings rates hit record lows

Inflation rises as savings rates hit record lows

Category: Savings

Updated: 19/07/2016
First Published: 19/07/2016

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 It is now over 6 months old so the content may be out of date.

Figures from the Office for National Statistics (ONS) show that inflation edged up in June to stand at 0.5%, up from 0.3% in May and making it the joint-highest seen in 18 months. Despite the rise, savers needn't worry too much about the impact of inflation on their funds, but they may want to worry about the state of the savings market as a whole.

Inflation-beating – but rate cuts are rife

Our data shows that the vast majority of the 770 savings accounts currently on the market – 593 of them, in fact – can beat or match inflation, and of these 525 (88 no notice accounts, 52 notice deals, 209 fixed rate bonds and 176 cash ISAs) are without restrictive criteria and open to everyone.

This means that there's still plenty of opportunity to secure inflation-beating returns, but unfortunately, that's where the good news ends. Indeed, rate reductions in the savings market have now outweighed rate rises for nine consecutive months, which has meant that average rates across the market have hit record lows.

The data shows that Moneyfacts recorded just 14 savings rate rises in June, but rate reductions over the same period completely outshone this figure, with the number of rate decreases standing at a staggering 117 – and some deals saw cuts of as much as 1.30%.

Rates may be inflation-beating but they certainly aren't that good, as Charlotte Nelson, finance expert at Moneyfacts, comments:

"Despite the Bank of England choosing to keep base rate static at 0.50%, savers are still faced with the prospect of savings cuts outweighing the number of rate rises in the market, making many wonder when the misery of poor returns will ever end.

"As a result of these rate cuts, has seen all average savings rates fall to the lowest on record. For example, the average five-year fixed rate bond has fallen sharply from 2.54% to 2.00% in just one year, but ISAs haven't been left untouched either, with the average ISA rate falling from 1.45% to 1.14% over the same period."

Fixed rate downturn

Things are certainly looking bleak at the money, and unfortunately, it's those savers who are looking for the security of a fixed rate bond who will be hardest hit by rate cuts. As Charlotte points out, 59% of all rate cuts have fallen at the fixed rate bonds' door, and savers will be extremely disappointed. These accounts offer savers some of the better deals on the market – or at least they used to – but with low SWAP rates and market uncertainty, these rates have dropped dramatically.

Looking even further back highlights just how far rates have fallen, and the results may surprise you. "Back in March 2009 the top easy access account paid 3.94% yearly, but today's savers will be unable to achieve anywhere near such a rate," added Charlotte. "In fact, savers would have to opt to fix for seven years to get the top deal in the market, which at 2.35%, is a whopping 1.59% lower.

"Mark Carney's announcement on Thursday is unlikely to make the life of the cash saver any easier. With uncertainty ahead, savers need now more than ever to shop around to get a good deal, and may want to look at non-traditional options such as current accounts to make their money work harder, too."

What next?

Rates may be falling, but this makes it more important than ever to be on the ball when it comes to your savings account. Compare the top deals to make sure you're getting the best returns possible.

Why not think outside the box? If you've got a relatively small savings pot – or are willing to undertake a bit of active management – compare high interest savings accounts to see if you can get more from your money.

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.