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Inflation stays put – but savings rates don’t

Inflation stays put – but savings rates don’t

Category: Savings

Updated: 22/03/2016
First Published: 22/03/2016

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 It is now over 6 months old so the content may be out of date.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 remained unchanged in February, with the rate of CPI standing at 0.3% for the second consecutive month. This means that savers have little to worry about in terms of inflation eroding the value of their funds, but unfortunately, they have other issues to contend with…

Savings rate landslide

Our data shows that rate reductions in the savings market have now outweighed rate rises for five consecutive months: we recorded just 12 savings rate rises during February, but rate reductions over the same period completely outshone this figure, with the number of rate decreases over the month standing at a staggering 235. Some deals fell by as much as 0.74%, with there being little to speak of in terms of improvement.

There's a slight glimmer of hope in that the vast majority of the 814 savings accounts currently on the market can beat or match inflation, and of these, 648 (144 no notice, 72 notice, 237 fixed rate bonds and 195 cash ISAs) are without restrictive criteria and open to everyone. But, with rates the way they are, even those beating inflation may not result in meaningful returns.

"Any hopes of an improvement in the savings market have been dashed," said Charlotte Nelson, finance expert at Moneyfacts. "According to our data, for every rate rise in February there were approximately 20 rate cuts, and there's little sign of improvement on the horizon. Thanks to the Bank of England base rate remaining at a record low for seven years, the Government's Funding for Lending scheme and low SWAP rates, savers are really starting to feel the pain."

As an example, seven years ago the top two-year fixed rate bond paid 4.18% yearly, but savers fixing today for the same term would get a rate that is 1.43% lower: Al Rayan Bank's two-year Fixed Term Deposit pays an expected profit rate of 2.75% gross, which although makes it the market leader, it's still well below the rates we saw in years past.

The end of ISA season?

Unfortunately, the ISA market has fared little better, despite the fact that we're in the midst of what is traditionally ISA season. Indeed, February saw a shocking 69 reductions in this sector, meaning ISA season has morphed from a period of rate rises to a time of rate cuts. There's little to be cheerful about in terms of averages, either: over the last two years the average easy access ISA rate has fallen by 0.19% to an all-time low of just 1.05%.

"There are no signs of an end to this downward spiral, either, so savers need to act fast to make their savings work hard for them," said Charlotte. "Today there are 131 accounts that pay 0.50% or less, and while savers know they are facing hard times they should not let their money languish in poor paying accounts – there are definitely better deals out there.

"Nevertheless, a lack of competition in the market means that the likelihood of a savings revival is poor. The new savings initiatives are a welcome gesture but savers will need more than this to make them see some light at the end of the tunnel."

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