Rising Inflation and Interest Rate Cuts Trouble Small UK Investors

With the recent cut in interest rates by banks and building societies, savers in Britain are now losing money in real terms. According to Moneyfacts, a financial research firm the average savings account today pays only 0.53 per cent while official data has shown that CPI inflation has climbed to 0.6 percent for the period between January to July this year.

There are wide spread expectations that interest rates will be cut again later this year to boost economic growth but it has caused many of those with savings to be concerned about their returns. The interest rate reduction by the Bank of England (BoE) from 0.5 percent to 0.25 percent has resulted in all banks slashing their rates for savings account.

A record 246 cuts have been announced in August alone. A few banks such as First Direct have in fact lowered their rates below that announced by BoE putting savers under a further squeeze.

Morningstar UK

The Yorkshire Building Society has cut the rate for its online savings account to 0.5 per cent from 1 per cent while Santander has announced that it is slashing interest rate for the owners of its 123 current account from 3 per cent to 1.5 per cent effective from this November. Experts believe that the BoE might go to the extent of imposing negative interest rates similar to central banks in other countries like Japan.

Charlotte Nelson, finance expert at Moneyfacts said the recent interest rate cut was a tipping point whereby a saver with an average saving account could soon start losing money in real terms. Many banks such as HSBC which is paying 0.05 per cent on its flexible saver account are already paying bare minimum.

In a statement Gareth Shaw, head of consumer affairs at Saga Investment Services said

Savers are making next to nothing in in deposit accounts.The slight increase in the Consumer Prices Index spells more bad news for savers, as inflation creeps towards the average return on savings accounts. In a month’s time, savers could well be losing money in real terms.

Moneyfacts has stressed that people must evaluate and explore all options available before choosing an account since there are several bank accounts that can be used to beat inflation. It has identified 501 accounts of the total 727 accounts available that savers can opt for better returns. Some examples are Virgin Money’s easy access savings accounts, which currently pays 1.16 percent and Shawbrook which is offering 1.7 percent on its two-year fixed rate savings bonds.

Charlie Harrison

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