Official figures from the ONS show that inflation remained at 2.6% in July, unchanged from June, going against many economists' expectations. However, this means that consumer finances are still being squeezed – the measure of CPI is still above the Bank of England's 2% target, with prices being far higher than at this time last year – and even the best savings accounts can't quite overcome it.
Our data shows there is still not one standard savings account on the market that can beat it, despite recent signs of life in the market. There is, however, a single account that can match the rate of 2.6% – a fixed rate bond from newcomer PCF Bank – but you'll have to lock away your cash for seven years for the privilege. However, it isn't all bad news – rates may not be inflation-beating, but our latest research shows that averages are continuing to rise!
July marks the seventh consecutive month where rate rises have outweighed cuts, with the figures showing 151 rises versus 45 reductions. As the table below shows, average rates have improved dramatically as a result, with fixed rate bonds playing a huge part in the recovery of the market.
Indeed, 60% of the rate rises recorded last month were for fixed rate bonds, which has helped push the average two-year bond rate to 1.32%, up from 1.04% at the start of the year, and it's a similar picture for longer-term bonds: the average three-year fixed bond rate has grown from 1.21% to 1.56%, while the average five-year bond now stands at 1.92%, up from 1.67% in January 2017.
|Average two-year fixed rate bond||3.34%||1.34%||1.04%||1.32%|
|Average three-year fixed rate bond||3.39%||1.54%||1.21%||1.56%|
|Average five-year fixed rate bond||3.88%||1.98%||1.67%||1.92%|
However, despite this latest improvement, savings rates overall still have a long path to recovery ahead of them. This is especially the case as improvement is currently being dampened by Government lending initiatives, with one such scheme – the Term Funding Scheme (TFS) – having just received a fresh money injection.
Rachel Springall, finance expert at moneyfacts.co.uk, said that the decision to pump more money into the scheme "is disastrous news for savers, as its continuation will allow banks and building societies to draw cheap money to fund their lending, which means they still won't need to rely on savers' deposits".
The scheme essentially allows providers to access money from the Government that they can lend to borrowers, which means they don't need to rely on their own balance sheet – and therefore the deposits they receive from savers – to fund their lending activities.
Such schemes have already had a huge impact on the savings market, as Rachel explains: "Five years ago, the predecessor of the TFS, called the Funding for Lending Scheme (FLS), aided borrowers, but like a double-edged sword, it created havoc in the savings market."
In July 2012, when the FLS was first launched, the average two-year bond rate stood at 3.34%, yet just 12 months later it had fallen to 1.84%. Today, it stands at 1.32%, which marks a loss of £202 in interest on a pot of £10,000 over the last year.
"Not only this, but there have been other Government initiatives which have damaged the return on savings interest for ISAs, such as the Personal Savings Allowance
which has shocked the ISA market since its introduction last April," continued Rachel. "The average easy access ISA paid 1.05% at that point, but today it stands at 0.62%.
"Savers are likely to have a few more years of low interest rates ahead of them. Combined with inflation eroding their hard-earned cash, it wouldn't be too surprising to find this is deterring people from putting money aside."
Standard savings rates may not be inflation-beating, but don't let that put you off – building a decent savings pot is essential to ensure you have a financial buffer, and if you want to ensure your cash isn't eroded, you'll have to think outside the box.
What about a high interest current account? These still pay the best interest rates around, with it possible to earn as much as 5% from Nationwide on certain balances. Then there are regular savings accounts, which again pay far better rates than their standard counterparts. In both of these cases, you may not be able to invest your full savings pot if you've got more than a few thousand pounds, but if you've got a smaller pot or are willing to move your money around a bit, they could be ideal.
Alternatively, it could be time to think about full-on investment, rather than cash savings. This comes with far higher risk, but for some, the potential for inflation-beating returns could be worth it; if you want to dip your toes in, a stocks & shares ISA could be a great place to start, but just make sure you seek suitable advice.
Compare the best savings rates
Consider stocks & shares ISAs
Check out the best high interest current accounts
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.