My chart today shows that for those that are looking to save it isn’t getting any better out there. Average interest rates on cash savings are declining if you are prepared to lock your money up for any period of time and if you want instant access the average increase is a miserly 0.07%. Let’s analyse the data in more detail.
Firstly, the red line which is defined by the Bank of England as the monthly average of UK resident banks sterling weighted average interest rate, interest bearing sight deposits from households not seasonally adjusted. As with previous reviews of this data set I’m interpreting that as current accounts and instant access savings accounts. The average rate being paid as of January 2010 is 0.8% up from 0.73% in the previous month. At this rate a 40% tax payer ends up with a real return of 0.48% and a 20% tax payer 0.64%. Compare with this with retail prices inflation (RPI) of 3.7% and it’s clear to see how bad it is. If you are prudent your money is being devalued at a rate of over 3% per year.
If you’re prepared to lock your money up for any period the rates are getting worse month on month. The blue line is the monthly average of UK resident banks sterling weighted average interest rates for new time deposits with a fixed original maturity of <=1 year from households not seasonally adjusted and is today achieving 1.1% down from 1.3% last month. Similarly, the olive line is the same but for >1 year but <= 2 years and is achieving 3.67% down from 3.84%. Finally the purple line is >2 years and is today achieving 3.83% down from 4.03%.
I don’t think banks, government and the Bank of England want people to save. The Bank of England certainly doesn’t as it has its Official Bank Rate at 0.5% while inflation is well above this. The banks don’t care. They can just borrow from the Bank of England overnight at the Official Bank Rate. Finally the government also doesn’t want you to save as is evidenced by National Savings & Investments (NS&I) New Direct Saver. This account has been launched to much fanfare and an email that I received from NS&I states ‘with our new Direct Saver, you’ll earn an attractive rate of interest and will have easy access to your money. And, like all accounts and investments from NS&I, your money will be 100% secure, backed by HM Treasury.‘ So what’s this attractive rate of interest? Wait for it. An almighty 2%. I can get a clean instant access account paying 2.5% by spending about 1 minute on the internet. So it’s clear the government also don’t want us to save.
Even though I’m being discouraged I’m going to continue to save hard into cash. I’m also going to remain with instant access accounts as even though on average I could get a much higher rate by locking my money away I want to remain nimble. I fear that inflation is going to continue to rise and either the Bank of England will see sense or the bond market will force interest rate rises in the not too distant future.
As always DYOR.