Inflation and interest rates – Are we due a revitalisation of saving?

The rate of inflation is expected to peak at around eight per cent this year, having already reached near-record levels of 6.2 per cent.

With the cost-of-living crisis persisting, higher fuel costs and many retailers already suggesting that they intend to increase their prices further to deal with their own additional energy and employment costs, the hopes of inflation falling any time soon seem slim.

It is not surprising that the Bank of England (BoE) has already increased the base rates three times in a row since December 2021, from 0.1 per cent to 0.75 per cent.

The next meeting of its Monetary Policy Committee is expected on 5 May 2022, which will decide whether or not the base rate needs to rise again.

Many expect an additional rise at this meeting, as the BoE is eager to prevent inflation from rising further, with some predicting that the base rate could increase to between 1.5 per cent and 2 per cent by the end of 2022.

The news of further interest rate rises won’t be welcomed by most borrowers, particularly those with debts linked to the base rate, but could it mean that savers make more of their investments?

The current interest rates on savings accounts remain fairly subdued but there are some signs that things may be improving.

Some of the top-paying savings accounts have increased the interest you can earn in recent weeks, albeit fairly minimally.

If the base rate keeps climbing to deal with inflation one might assume that savers are in for a windfall.

However, you cannot assume that the interest on your savings account will automatically increase with the rate set by the BoE.

Many of the accounts out there still have woefully low interest rates, with even ‘high-interest savings accounts’ only offering rates of around 2 per cent, but only if a saver is willing to leave their investment untouched for up to five years.

Even if interest rates on saving accounts do increase, many will struggle to keep pace with inflation, which means that in real terms the returns gained won’t keep pace with rising prices.

While the news around savings might not seem all that positive, savers are still encouraged to put money away securely and at the best rates that they can.

Even a small amount of interest will compound over time to help a savings account grow, whereas money left in a regular bank account may only earn a minimal amount of interest (often around 0.1 per cent).

Additionally, ISA savings are tax-free and so could help a person to manage their annual tax bill, while still earning a little back from the money they deposit.

Link: Will inflation in the UK keep rising?