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Low inflation + rising rates = happy savers!

Low inflation + rising rates = happy savers!

Category: Savings

Updated: 15/09/2015
First Published: 15/09/2015

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 It is now over 6 months old so the content may be out of date.

Savers, we've got two pieces of good news for you today – not only has inflation fallen back to zero, but we can reveal that savings rates are showing signs of improvement! Could it be that the tables are starting to turn for savers?

Rates are on the rise

Moneyfacts' figures show that fierce competition is leading to encouraging signs of improvement in the savings market, as since the start of August, we've recorded 155 savings rate rises, with some increases being as high as 0.75%. This completely dwarfs the 31 rate reductions that have taken place over the same period, and happily, this rise in positive activity is having a welcome effect on rates.

For example, our data shows that the rate paid on the best 120-day notice account has risen from 1.85% a year ago to 1.96% today, which is a much-needed improvement for disillusioned savers. Not only that, but the number of rate increases would have been "unheard of" six months ago, said Charlotte Nelson, finance expert at Moneyfacts, with this rising level of competition giving a boost to the market.

"It's fair to say that life is indeed returning to the market," said Charlotte. "The newer banks are offering savers a lifeline, with competition among them leading to rising rates. For instance, in just one week, 12 savings accounts have had their rates boosted by the likes of Barclays Bank, Charter Savings, Shawbrook Bank, Virgin Money and Yorkshire Building Society, with challengers comfortably giving the big names a run for their money."

Inflation falls back to zero

The latest inflation announcement also offers good news to savers, with official figures showing that the inflation rate fell from 0.1% to 0% during August. Essentially, this means that savers won't be greatly impacted by its erosive effects, as the cost of living remains the same as it was a year ago.

Unsurprisingly, this means that all of the 890 savings accounts currently on the market can beat inflation, and of these 723 (156 no notice, 79 notice, 270 fixed rate bonds and 218 cash ISAs) are without restrictive criteria and are open to everyone, so it could be time to check them out!

Things are definitely improving, as a year ago, only a quarter of the accounts on the market could beat inflation, and not one of them was an easy access version. Now, that's a thing of the past, but unfortunately, it doesn't mean it's all plain sailing for savers.

Still room for improvement

Inflation may not be too much of a concern for savers at the moment, but the long-term effects of it are still being felt. Our calculations show that savers who invested £10,000 five years ago will have been impacted by the damaging effects of high inflation, tax deductions and low interest rates of the following years: based on the average interest earned from easy access savings accounts and average inflation and tax at 20%, their spending power will have dropped to just £8,737.93 today.

Not only that, but savings rates still aren't as high as many would like them to be, and as Charlotte points out, there's still a long way to go before rates are on a level footing with the deals on offer before the Funding for Lending scheme was introduced. For example, the average one-year fixed rate bond pays 1.50% today, but in September 2011 – before the FLS was launched and had the knock-on effect of decimating the savings market – the average was substantially higher at 2.79%.

Make the most of the competition

However, even though there's a long way to go before we get back to the dizzy heights of the pre-FLS and financial crisis years, that's not to say you can't hunt out a good deal. It's all about making the most of now and finding an account that suits your needs, and you may want to start thinking outside the box.

"Competition may be returning to the market, but savers looking at rates need to consider whether it is worth fixing or opting for a deal with a little more flexibility," added Charlotte. "Notice accounts are a key focus for the challenger banks: competition is fierce and rates have subsequently risen, so much so that rates in this sector are now on a par with deals in the one-year fixed rate bond market. Savers should therefore bear this in mind before locking their money away.

"Furthermore, 80% of easy access accounts have not been switched in the last three years (according to figures from the Financial Conduct Authority), which means that consumers are missing out on higher interest payments, even if their balance is low. Savers may think that it is a hassle to switch and that there will be little to gain from moving, but with rates on the rise, better deals are out there."

So, why not get involved? Staying loyal to your savings provider rarely pays dividends, especially given the growing number of challengers competing for your business, so now could be a great time to compare the options and see if you can benefit from the market.

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.