🔔 While inflation and the base rate remain static, savings rates continue to fall

Author: Anna Bowes
19th December 2019

Although inflation remained level for the second month in a row, again below the official target of 2%, the Bank of England also kept the base rate on hold at 0.75% - presumably as they wait for the dust to settle following the General Election - and perhaps in response to some slightly more encouraging news about the economy.

Cat on a chair by the radiator

According to the Office for National Statistics, The Consumer Prices Index (CPI) was at 1.50% in November, unchanged from October, with the price of food and in particular boxes and cartons of chocolate and chocolate covered ice cream bars having the biggest upward influences, rising by more than it did this time last year. This was offset by a price reduction in alcohol and cigarettes, amongst other things.

So those with a sweet tooth may find Christmas a bit more expensive this year, although this could be balanced out if you also like the odd tipple!

Although the Monetary Policy Committee (MPC) did keep the base rate on hold again this month, once again two of the nine members voted for a cut to 0.50%. And although the two were outvoted by the seven other members, according to the committee minutes any future cut can’t be ruled out. The minutes stated, “If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the recovery”.

The bad news for savers is that although consumer price inflation has remained steady, best buy savings accounts have been falling as the market is still anticipating a base rate cut at some point.

At the time of the November inflation announcement (18/12/19), there were still 296 savings accounts that match or beat the CPI at 1.50% - with a notice account from BLME offering the best access of just 90 days, with a rate of 1.71% AER.

But this is a smaller number of accounts than when the October announcement was made a month ago, at which point there were 328 inflation beating accounts.

Of course the inflation announcement is backward looking – stating what inflation was last month, whereas we don’t know what the future will hold and therefore an account opened today paying 1.70% may not continue to beat inflation, especially if it gets back to the target of 2%.

But what we can say is that by shopping around and choosing the highest savings rates that you can find that suit your access requirements, you can reduce the impact that inflation can have on the purchasing power of your money.

For example, if you keep your cash in the HSBC Flexible Saver account which has this week seen the rate paid cut to 0.10% - if this rate and inflation were to remain at these levels, the real value of a deposit of say £50,000 would have fallen to £46,646 after five years – because items you may wish to purchase will have increased by more than the interest earned on your account.

On the other hand, you were to choose a best buy easy access account paying 1.40%, while your £50,000 would still be worth less in real terms, it would be £3,110 more at £49,754.

Better still, if you don’t need immediate access to all the money, you could perhaps put some into a notice account or fixed rate bond – the best of which are currently paying more than the rate of inflation.

If your £50,000 was in a one-year fixed rate bond or notice account paying around 1.70%, after five years, assuming you didn’t take out the interest, your £50,000 would be worth £50,495 in real terms.

In order to find the best easy access, notice account or fixed rate bond – or any other savings account - remember to keep an eye on our best buy tables.