Inflation falls but is an interest rate rise around the corner?

21st November 2016

Despite many experts predicting a rise in inflation to a two-year high, the latest figures from the Office for National Statistics (ONS), released last week, showed a decrease in the Consumer Prices Index (CPI) to 0.90%. Whilst this came as a surprise to many, inflation is still expected to rise sharply over the coming year, above the Bank of England’s 2% target.

The prospect of rising inflation is a worry, with the very real risk of savers' money reducing in value in real terms, if the return is not enough to beat it. This is coupled with low interest rates and is further compounded by the number of interest rate cuts for existing savers, following the reduction in the Bank of England base rate in August.

However, better news could be around the corner as market sentiment suggests that higher inflationary pressure could lead to better interest rates for savers. However, savers can’t take this for granted, particularly as inflation is not necessarily the only driver of better savings rates, with competition between providers a big factor. Therefore, you should look for the best possible rates you can now and not delay taking action, as you could miss out on valuable interest in the meantime.

Although CPI has decreased from 1% last month to 0.90%, over half of savings accounts are not beating the current rate of inflation, which is over 2,100 accounts paying 0.90% or less. There are a lot of savers that hold these accounts and if you are one of them, you should switch now to a better deal.

There are a number of accounts that beat the current rate of inflation and some that even beat the levels that are being predicted to happen over the coming year. For instance, you can still get 5% AER with Nationwide or 3% AER with Tesco Bank. For those who prefer a fixed return, there are a number of fixed rate bonds that beat inflation, ranging from 1.40% for 1 year to 1.95% for five years, for more details, take a look at our Fixed Rate Bond Best Buy Tables.

The latest inflation report, which was unveiled by the Bank of England earlier in the month stated that CPI was expected to rise to 2.80% in 2018 and 2.70% in 2019. So, last week’s fall seems to be the last thing that many experts expected to happen.

Mark Carney, the Governor of the Bank of England, himself said that there are limits to the Bank’s tolerance of higher inflation. The implication being action in the form of increased interest rates.

Meanwhile, the Chancellor, Philip Hammond has been urged to ignore this unexpected fall in inflation and use this week’s Autumn Statement to put measures in place to support those who would suffer most from rising inflation. We would echo this sentiment, though only time will tell what these measures will be and what effect they may have on savers. We will, of course, keep you up to date with the changes following the Autumn statement, so look out for our newsletters this week.

The number of accounts that don't beat inflation will only get worse if, as expected, inflation rises over the coming year. Action should be taken now to ensure you maximise returns and stay ahead of inflation, both now and in the future. One approach to consider is a balanced savings portfolio, using High Interest Current Accounts and fixed rate accounts to get as much interest as possible, whilst also hedging your bets on what will happen with rates with variable rate accounts.

If the forecasts are to be believed, improved interest rates could be just around the corner and it’s been a long time coming.

If you need help finding the best rates and building your balanced portfolio, call us on 0800 321 3581 to talk to one of our expert savings advisers. 

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