The Struggle Between Savings Rates and Inflation
Savings rates are currently falling behind inflation, which means many individuals who keep their money in bank accounts may be losing value over time. Inflation has increased slightly to 3.6 per cent in June, up from 3.4 per cent in May. This rise in prices poses a challenge for savers because it reduces the purchasing power of their cash.
To maintain the same level of buying power, savings need to earn at least the same rate as inflation. However, the average savings rate is currently at 3.51 per cent, according to data from Moneyfacts. This figure includes all types of savings accounts, such as fixed-rate bonds and easy access accounts.
The average rate for easy access accounts has dropped to 2.68 per cent this month, which is significantly lower than the current inflation rate. Even easy access ISAs, which offer tax-free interest, typically provide around 2.92 per cent. This gap between inflation and savings rates highlights the financial strain on savers.
Factors Contributing to Lagging Savings Rates
The Bank of England plays a crucial role in managing interest rates through its base rate. When inflation rises, the Bank increases the base rate, and when it falls, it lowers it. Over the past year, the Bank has been gradually reducing its rate as inflation has decreased. As a result, high street lenders have also lowered their savings rates.
However, inflation has remained well above the Bank’s target of 2 per cent, leading the Bank to hold rates at 4.25 per cent in June. Despite this, experts predict further rate cuts in the coming year, which could continue to impact savings rates. Banks have already factored these potential cuts into their pricing strategies, causing interest rates to decline further.
Strategies for Savers to Combat Inflation
One of the most effective ways to counteract inflation is to move money into high-yield savings accounts. According to Moneyfacts, there are currently 1,289 savings accounts that offer rates higher than the current inflation rate. These include 636 fixed-rate bonds and 119 easy-access accounts.
Some of the best easy-access savings options include:
- Top Easy Access Saver: Chase Bank offers 4.89 per cent, including a 2.25 per cent bonus for 12 months.
- Top Easy Access Cash ISA: Plum provides 4.92 per cent interest.
Experts recommend that savers actively seek out the best deals available, as savings rates are expected to decrease further in the coming months. Locking money away for a period can often lead to higher returns. For example, the average one-year fixed bond rate reached 4.03 per cent this month.
Sarah Coles, head of personal finance at Hargreaves Lansdown, emphasized the importance of securing favorable rates now, while they are still available. She advised against settling for average rates, as better options exist through online banks and savings platforms.
Exploring Investment Opportunities
For those willing to take on some risk, investing can be a more effective way to beat inflation. According to research by Fidelity, a £1,000 investment in a world tracker fund on New Year’s Eve 1999 would now be worth around £5,000, compared to just £1,700 if kept in cash.
Dean Butler, managing director for retail direct at Standard Life, suggested that individuals considering investments should look into tax-efficient products like stocks and shares ISAs or pensions for long-term growth.
Future Outlook on Inflation and Interest Rates
The Bank of England has indicated that it may cut interest rates in August. However, recent inflation figures could influence this decision. Dan Coatsworth, investment analyst at AJ Bell, noted that if higher inflation becomes a trend, the Bank may struggle to continue lowering rates at the current pace. This uncertainty highlights the need for savers to remain vigilant and proactive in managing their finances.