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Inflation rises, but savers have the January Blues

Inflation rises, but savers have the January Blues

Category: Savings

Updated: 20/01/2016
First Published: 19/01/2016

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 It is now over 6 months old so the content may be out of date.

Official figures from the Office for National Statistics show that UK inflation rose further into positive territory in December, with the measure of CPI standing at 0.2%. This is up from the rate of 0.1% in November, and happily, is further above the level of deflation that had been recorded in the two months previously.

However, savers may not be rejoicing too much, as not only does this mean that inflation could start to have more of a corrosive effect on their savings, but our figures reveal that they've been contending with numerous rate cuts over the last month. In fact, our data shows that rate reductions in the savings market have now outweighed rate rises for three consecutive months, the first time this has happened since daily rate change monitoring began.

Continued cuts

Moneyfacts recorded just 30 savings rate rises during December, with only one deal posting a significant increase of 0.50%. Disappointingly, rate reductions over the same period completely eclipsed this figure, with a whopping 93 rate cuts recorded over the month – and some deals fell by as much as 0.55%.

There's slightly better news in the finding that the vast majority of savings accounts on the market pay a rate that will match or beat inflation – there are currently 863 accounts available on the market, of which 661 (124 no notice, 71 notice, 256 fixed rate bonds and 210 cash ISAs) are open to everyone, and most pay comfortably more than 0.2%.

Nonetheless, inflation could still be taking its toll, and certainly has done so over the last few years – our calculations show that £10,000 invested back in 2010 will now have a spending power of £9,158 thanks to the damaging effects of inflation, tax deductions and low interest rates of the following years – so the fact that providers are continuing to cut rates will come as even less welcome news.

A disappointing start

Looking closer at average rates highlights how far the market has fallen: five years ago, the top five-year fixed rate bond paid 4.75% yearly, but savers fixing today for the same term would get a rate that's 1.55% lower, with the top five-year bond paying just 3.20%.

The easy access sector has been affected, too, as back in 2011, savers would have been able to enjoy a rate of 2.90% with an easy access account, but now the best instant access deal pays a much lower 1.65%. ISA rates have arguably fared even worse, with the bulk of recent rate cuts being centred on this sector of the market.

All in all, it hasn't been a great start to 2016 for savers, as Charlotte Nelson, finance expert at Moneyfacts, comments: "This is the third month in a row that the savings market has seen rate cuts outweigh increases.

"This time of year is usually when we start gearing up for ISA season, but ISAs have been hit hardest by December's rate cuts, and with the new tax rules for all savings accounts coming into place in April, it's likely that rate decreases will continue. In short, this year's ISA season is likely to be as dull as dishwater."

An alternative solution?

Savings rates may be pretty dire at the moment, but there could be a saviour – and it comes in the form of current accounts. Not only do many offer high rates of in-credit interest – often far higher than could be achieved from a traditional savings account – but many providers offer generous cash incentives to encourage consumers to switch, and our calculations show that the potential overall earnings can quickly add up.

"It seems that providers are abandoning their savings accounts in favour of their current account offerings, which have recently been bolstered by an abundance of cash incentives to entice new customers," said Charlotte. "Savvy savers would be wise to take advantage of this, as some high interest current accounts now pay returns of up to 5%."

This could well be the ideal solution, in the short-term at least, as sadly, the savings landscape looks set to remain bleak for quite some time yet. Charlotte concludes: "All savers want to do is catch a break amid the torrent of rate cuts and poor interest deals, but at the moment their only hope rests on a possible base rate rise later this year."

What next?

Compare current accounts

Rates may be falling, but there are still some good deals to be found, so compare the best savings accounts to see if you can boost your returns

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.