The Bank of England froze the base rate for the 12th consecutive month on Thursday, keeping it at all time lows of 0.5%.
Rising inflation, which hit 3.5% in January, had fuelled speculation that the Bank may be considering increasing interest rates. However, governor Mervyn King has said he expects the current spike in inflation to be temporary. For the moment, however, savers risk real-term losses unless they move to Best Rate accounts.
The Bank of England cut base rate drastically during 2008, in response to the ‘credit crunch’. It was at 5.5% in February 2008, but by the end of the year was down to 2%. In 2009 the downward spiral continued, with base rate dropping to 1.5% in January, 1% in February and an historic low of 0.5% in March 2009, where it has stayed ever since.
Inflation risk to savers
The combination of low interest rates and high inflation spells danger for savers.
James Daley, Money Editor of Which? said ‘If you’ve been earning less than 3% on your savings over the last few months, then the likelihood is that your money has actually been losing value in “real” terms – especially once tax has been deducted. Put simply, your savings wouldn’t buy you as many goods or services today as they would have done 12 months ago, which is why it’s vital you make sure you’ve got your money in an account paying the best possible rate of interest.’
Top rates still attractive
Although many accounts fail to match inflation, it is possible to get a healthy return by locking your money away in fixed rate bonds. It’s possible to get rates of over 5% if you’re willing to lock up your money for five years. The risk in doing this is that if interest rates improve between now and 2015, you won’t be able to move your money. Many savers may opt to go for a compromise, with shorter term two-year or one-year bonds. These offer lower rates but still beat easy-access accounts.
Cash Isas worth considering
Top rate cash Isas are also worth considering as a hedge against inflation. For higher-rate taxpayers they are particularly attractive, although standard-rate (20%) taxpayers can benefit too. From April 2010 the annual allowance for cash Isas rises to £5,100, irrespective of age.
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