Savers are being urged to look closely at where their savings are held as better rates, which will do more to protect the value of savings against rising inflation, are available. Our Savings Director, Derek Sprawling, explains more.
Global economic growth is slowing down, and the UK is set to be hit by a further step-up in inflation later in 2022.
That was the stark message from the governor of the Bank of England at the recent European Central Bank conference.
Citing the planned lifting of the UK’s energy price cap later this year the governor, Andrew Bailey, warned that the UK is more vulnerable to the impact of global energy price rises than other European countries.
The governor’s remarks were prompted by questions on whether the Bank would continue with its run of base rate rises, with the Monetary Policy Committee doing so at each opportunity so far this year.
While he wouldn’t be drawn on whether we’ll see a further 0.50% rise to combat inflation in the coming months, the governor did little to dampen increasing expectations of the Bank taking such a step and said the possibility was on the table.
The question now appears to be when they will do so, not if.
This year has already recorded the fastest rise in the base rate in over a decade, with the current rate of 1.25% of the highest seen since the crash of 2008 - and we have not seen a 0.5% rise in almost thirty years.
That such a rise is now likely is a clear indication of the Bank’s growing concern for the times ahead, and a reminder to savers to find the best options to protect the value of their savings pots.
Recent CACI data highlighted the impact of base rate rises on the value of savings, with the value held in accounts that offered up to and including 0.1% interest falling from £411.4 billion to £329 billion.
High street providers are falling further away from the competitive rates offered by Specialist Banks, creating a polarisation in rates paid. Most savers will continue to receive far less than they could be.
Better rates, which will do more to protect the value of savings against rising inflation, are available and proactive savers will receive the benefit.
The new CACI data also highlighted how, even with the growing inflation-driven pressure on personal finances, that overall UK savings continued to grow from March into April with a rise from £993 billion to over £995 billion - but the rate of growth appears to be slowing.
The Bank of England’s Money and Credit report for May recorded £5.4 billion of deposits for the month, a decline of £0.3 billion compared with April and £0.6 down on March.
Whether the overall savings balance continues to rise, however slowly, or hold steady against the forecasted step-up in inflation will be an interesting indication of how the economy is faring. Though it’s important to remember that cost of living expenses threaten consumer confidence and therefore willingness to borrow.
Whilst savers protect their rainy day money, if appetite to borrow falls then UK banks will continue to see a surplus in cash system wide, benefiting the big banks most. That’s why Governor Bailey is also signalling that higher rates are temporary.
Will savers respond by delaying big purchases to protect the value of their savings until inflation starts to recede, or will the increasing cost of essentials start to see them dipping into their accounts on rainy days or support their families.
New research led by Paragon Bank found that two out of five savers have been providing financial support to their families due to the cost-of-living crisis, with those over 70 more likely to do so than those in their 40s. This new pressure on savings, and the ability to save, is a concern, but the need to save what you can remains vital.
Proactive planning could benefit savers in both scenarios, and I urge those with savings in low-interest accounts to look closely at what is available and to make the right decision for their circumstances.