But banks look set to take their time to raise rates on retail deposits, writes Jeff Salway
Cash savers were given a boost this week with a welcome fall in the rate of inflation – and more good news could be on the way over the coming months.
But while competition for savings business is set to pick up as banks seek extra funds for mortgage lending, the improvement is expected to be slow and leave savers with few accounts offering real returns.
The latest inflation figures, published on Tuesday, revealed that the consumer prices index dropped to 2 per cent last month. It was a second successive monthly fall and the first time the rate of inflation has met the government-set target of 2 per cent since November 2009.
There are now nearly 80 accounts available to savers that pay a return outstripping inflation, according to Moneyfacts, compared with just nine in September.
But rates remain at record lows and while there has been an improvement in competition of late, that has centred on long-term savings bonds.
Savers continue to suffer from the launch in August 2012 of the funding for lending scheme (FLS). By giving banks and building societies access to cheaper finance, it reduced their dependence on savers for the deposits with which to fund their mortgage lending.
The result has been a plunge in interest rates that has all but wiped out any value from cash accounts.
The typical easy access account pays just 0.64 per cent, with the best deal from Coventry Building Society still below inflation at 1.6 per cent. The average cash Isa pays 1.64 per cent, Moneyfacts figures show, down from 1.87 per cent a year ago.
The top variable Isa accounts, from providers including Islamic Bank of Britain and the Post Office, pay around 1.8 per cent. The only Isas beating inflation are bonds fixed over two years or longer. This is the one area where rates have been rising, but it means savers have to be comfortable with locking their money away for a period.
“We have a situation where to beat the rate on a one-year bond before FLS was introduced (3.45 per cent) you now have to lock your cash away for seven years,” said Andrew Hagger, of personal finance website Moneycomms.co.uk.
“The FLS has impacted savers far more seriously than anyone could have imagined.”
The recent competition has been limited to four and five-year fixed terms, reflecting an expectation that interest rates will rise in 2015. The top four-year fixed rate bond now pays 2.91 per cent, up from 2.75 per cent a year ago, while over five years the highest rate has increased over the same period from 3.05 to 3.21 per cent.
Charlotte Nelson at Moneyfacts said: “As the mortgage market has seen a resurgence with the recent launch of the government’s Help to Buy scheme, banks are now looking for extra funds, by increasing long-term fixed rate deals.”
The good news for savers is that the FLS for mortgages is being withdrawn next month, with the scheme being re-directed towards small business lending.
“It will be interesting to see how quickly banks and building societies turn their attention back to retail deposits to fund future lending requirements,” said Hagger.
The best-buy savings tables are currently dominated by the likes of the Post Office, the supermarkets and challenger brands including Shawbrook Bank and Aldermore. In other words, the high street lenders are not looking for deposits from savers.
“But with mainstream banks possibly needing retail savings balances again there’s likely to be increased competition during the coming year,” said Hagger.
He believes the decline in savings rates is now at an end. The upswing is likely to be gradual, however, with much depending on the level of demand for mortgage borrowing during 2014 and beyond.
That means savers are still better off looking at alternatives to traditional cash accounts.
“Peer-to-peer lenders Zopa and RateSetter continue to grow and with savings rates of 5 per cent or more on the table, they attract savers who have become increasingly disgruntled with the poor returns on offer from the banks and building societies,” said Hagger.
Nelson at Moneyfacts urged savers preferring to stick with traditional products to spread their savings across short-term deals, rather than tie into long-term fixes.
“They then have the choice of moving some of their investment quickly with market movements,” she pointed out.