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Inflation rises, but savers face more rate cuts

Inflation rises, but savers face more rate cuts

Category: Savings

Updated: 15/03/2016
First Published: 16/02/2016

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 It is now over 6 months old so the content may be out of date.

Latest figures from the Office for National Statistics (ONS) show that UK inflation rose further in January, with the measure of CPI standing at 0.3%. Not only is this a welcome boost from the 0.2% seen in December, but it also marks a 12-month high, with much of last year being blighted by zero inflation and, at some points, deflation.

Even with the rise in inflation, savers shouldn't have too much to worry about in terms of savings erosion, with the vast majority of the 837 savings accounts currently on the market able to beat or match inflation. Of these, 662 (142 no notice accounts, 71 notice versions, 252 fixed rate bonds and 197 cash ISAs) are without restrictive criteria and open to everyone, which means there's plenty of choice for those seeking inflation-beating returns.

However, it isn't all good news, as although savers' precious funds won't be greatly affected by inflation, they could be impacted by the ongoing trend of rate cuts. In fact, our latest data shows that rate reductions in the savings market have now outweighed rate rises for four consecutive months, the first time this has happened since daily rate change monitoring began.

The figures speak for themselves: in January, we recorded just 21 savings rate rises, with only one deal posting a significant increase of 0.20%. Disappointingly, rate reductions over the same period completely eclipsed this figure, with the number of rate decreases over the month standing at a staggering 138, with some deals falling by as much as 0.75%.

It's bleak news for savers, with rate cuts becoming firmly entrenched in 2016. This "will be disappointing news to savers who had been hoping that this year would be a turning point for the savings market," said Rachel Springall, finance expert at Moneyfacts, and it doesn't look as though things will improve in the short term, either, even with the annual ISA season on the horizon.

"This year's ISA season is likely to be a shadow of its former self after January saw 30 rate cuts made to ISAs compared with just seven rises, with reductions as high as 0.44% being made in some cases," said Rachel. "So far this year the only decent ISAs to surface have been the Help to Buy: ISAs, which are only available to first-time buyers."

Much of the blame can be placed on the various lending initiatives that have been implemented in recent years, such as the Funding for Lending Scheme (FLS), and looking back reveals the extent of the damage they've had on the savings market. In 2012, before the FLS took hold, the average rate on a two-year fixed bond was 3.31% yearly, but today it's halved to just 1.66% – a shocking reduction.

Challenger banks have been the only saving grace in recent months, but unfortunately, there are fears that even they may not be able to sustain decent rates for much longer – and with base rate largely expected to remain on hold for at least the next year and possibly beyond, there doesn't appear to be much light at the end of the tunnel.

"Dampened competition could even mean that we begin to see challenger banks, which currently hold sway over the Best Buys, price down their savings deals," said Rachel. "Most recently RCI Bank UK dropped its market-leading easy access savings rate from 1.65% yearly to 1.55%, although it still sits head and shoulders above its closest rival.

"With a rise to base rate now expected to be put back until next year, savers are unlikely to see a spurt of competition in the market and should therefore brace themselves for more rate cuts."

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.