Savers face struggle to keep ahead of inflation as interest rates set to stay low

SAVERS face a prolonged struggle to secure above-inflation returns after the Bank of England warned that the base rate could stay at its record low for another year.

The returns paid by savings accounts have plummeted since the Bank cut interest rates to a record low of 0.5 per cent last March, depriving millions of savers of vital income. The interest rate paid by average instant access account is now just 0.17 per cent, unchanged since last May and compared with 2.77 per cent in January 2008, according to Bank figures.

And the Bank's latest quarterly inflation report, published this week, suggested that interest rates could stay at their record low of 0.5 per cent into 2011. With inflation likely to be around the 3 per cent mark in the near term, basic rate taxpayers need accounts paying 3.63 per cent or more just to achieve real returns.

But rates continue to slip and a clutch of best-buy deals have been withdrawn or reduced in recent weeks. The average rate of the top five savings accounts has dropped to 2.89 per cent, compared to 3.04 per cent at the beginning of the year, according to Moneysupermarket.com.

Kevin Mountford, head of savings at moneysupermarket, said the outlook for savers was bleak.

"There has been a good deal of public debate around the treatment of savers recently, but these moves seem to suggest things won't be getting much better in the near future for this marginalised group," he said.

Faced with rock-bottom rates on cash Isas and savings accounts, savers not dependent on their savings for income and happy to put their money out of reach for a specific period have increasingly turned to fixed-rate bonds. That option is now losing its appeal, however, with the interest paid by the average fixed-rate bond down from a high of 3.05 per cent last August to just 2.46 per cent at the end of January.

Andrew Hagger, head of communications at Moneynet, said: "To rub salt into the wound, swap rates for both two and five years have fallen by almost 0.4 per cent since the start of the year, so the chance of seeing rates on fixed-rate bonds picking up is also looking increasingly remote."

And even when the base rate does rise it may be some time before savers see any improvement, he added. "Some providers will use the opportunity to restore their profit margins and won't pass the full benefit on to savers."