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15 Jan 2020

Inflation fell in December 2019: could a notice savings account get you the best interest rate?

Find out how the best savings rates compare to the current rate of inflation

Inflation fell to 1.3% in December 2019 - the lowest rate in more than three years - according to the latest figures from the Office for National Statistics (ONS).

The Consumer Price Inflation (CPI) is down from 1.5% in October and November 2019. Such a low inflation rate has not been seen since it measured 1.2%, in November 2016.

Here, Which? explains why inflation has fallen and where you can find the best savings rates to match or exceed it right now.

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Why has inflation dropped?

The main factors behind the inflation decrease include price drops in overnight hotel accommodation and restaurants, as well as women's clothing, food, and non-alcoholic beverages. Airfare price reductions were also a contributing factor.

The graph below shows how CPI inflation has fared over the past few years, using figures from the ONS.

The Bank of England is tasked with keeping inflation as near to 2% as possible. Inflation has been below this benchmark since August 2019.

CPI inflation peaked at 3.1% in November 2017, and at the time no savings account paid a rate that could equal or beat it.

The current situation is better for savers, with inflation at its lowest level since November 2016.

Best savings rates that beat December inflation

The table below sets out the best Isa interest rates currently available depending on how long you're willing to lock up your money for.

Account typeAccountInterest rate (AER)TermsDoes this account beat December 2019 inflation?
Five-year fixed-rate savings accountUnited Bank UK 5 Year Fixed Term Deposit2.38%£2,000 minimum initial depositYes
Five-year fixed-rate cash IsaUnited Bank UK 5 Year Fixed Rate Cash Isa2.03%£2,000 minimum initial depositYes
Four-year fixed-rate savings accountBank of London & The Middle East 4 Year Premier Deposit Account2.1% (EPR*)£1,000 minimum initial depositYes
Four-year fixed-rate cash IsaSecure Trust Bank 4 Year Fixed Rate Cash Isa1.8%£1,000 minimum initial depositYes
Three-year fixed-rate savings accountBank of London & The Middle East 3 Year Premier Deposit Account2.1% (EPR*)£1,000 minimum initial depositYes
Three-year fixed-rate cash IsaMetro Bank 3 Year Fixed Rate Cash Isa1.7%£1 minimum initial depositYes
Two-year fixed-rate savings accountBank of London & The Middle East 2 Year Premier Deposit Account1.95% (EPR*)£1,000 minimum initial depositYes

*Expected profit rate. Source: Moneyfacts. Correct 14 January 2020; rates subject to change.

December's low inflation rate can be beaten by all of the top-rate accounts in our table - it's very unusual for instant-access accounts to do this.

Longer-term savings accounts tend to pay much higher rates than inflation. However, before committing to one of these you'll need to consider whether you can definitely do without that money for several years, and whether rates are likely to increase while your funds are locked up.

Many of the top deals are from Sharia-compliant providers. These firms offer an Expected Profit Rate (EPR), rather than an annual equivalent rate (AER).

The rate is not guaranteed and could be adjusted at any time - but at the time of writing we have not heard of an instance where an advertised EPR has not been paid.

Should you consider a notice account?

Notice accounts bridge the gap between instant-access and fixed-term accounts; you're usually allowed to make unlimited withdrawals, but you'll have to give a certain amount of notice until your money is released. The notice is generally detailed in the name of your account - most commonly it's 30, 60 or 90 days.

It usually follows that the more notice you're required to give, the higher the AER you'll receive.

Notice account rates have historically proved much steadier than other types of accounts: while savings rates have dropped across the board, average rates for notice savings accounts have only fallen by 0.01% since February 2019.

The graph below shows how the average rates for notice savings accounts and notice cash Isas have compared to long-term savings accounts over the past 12 months, using data from Moneyfacts. We've defined 'long-term savings account' as being 18 months or more.

Average rates have fallen by 0.37% over the past year, down from 1.85% in February 2019 to just 1.48% this month.

While it's true that average notice account rates are still lower, they could be on the up as a new top-rate account was recently launched by Paragon Bank. Its 120-day notice cash Isa pays 1.31% AER, and requires a deposit of £500.

The table below shows the top notice account rates for the most common notice periods.

Account typeAccountInterest rate (AER)Terms
30-day notice savings accountSecure Trust Bank 30 Day Notice Account1.4%£1,000 minimum initial deposit
30-day notice cash IsaAldermore 30 Day Notice Cash Isa1.3%£1,000 minimum initial deposit
60-day notice savings accountCharter Savings Bank 60 Day Notice1.5%£5,000 minimum initial deposit
60-day notice cash IsaKent Reliance 60 Day Notice Cash Isa1.2%£1,000 minimum initial deposit
90-day notice savings accountBank of London & The Middle East 90 Days Notice Account1.71% (EPR*)£10,000 minimum initial deposit
90-day notice cash IsaEarl Shilton Building Society 90 Days Notice Cash Isa1.3%£10 minimum initial deposit. Can only be opened by those living in postcode areas of LE, CV9-13 inclusive and DE11-15 inclusive
90-day+ notice savings accountInvestec Bank Plc Notice Plus 95 Day1.8%£10,000 minimum initial deposit

*Expected profit rate. Source: Moneyfacts. Correct 14 January 2020; rates subject to change

Bear in mind that some of these top-rate accounts require large minimum initial deposits - in fact two of them would need at least £10,000, which may not be possible for those with smaller savings pots.

All but one of the top rates here can match or exceed the inflation rate for December 2019.

How does CPI inflation affect your savings?

CPI inflation tracks the prices of around 700 popular goods and services, from train fares to gym leggings - all held in an imaginary shopping basket.

The figure released each month shows how the price of everything in the basket has collectively changed in comparison to prices in the same month of the previous year. So, if you had bought all of the goods and services in December 2019 you'd have paid 1.3% more than in December 2018.

This affects the buying power of money held in a savings account. If your interest rate doesn't equal or exceed inflation, your savings will effectively lose value over time - meaning you'll be able to buy fewer things with the same amount of cash.

That's why it's important to make sure your money is held in an account that beats the rate of inflation.

Save with a Which? Recommended Provider

You can search through hundreds of cash Isas and savings accounts with Which? Money Compare.

The comparison site details the interest and terms of an account, as well as how it rated in our unique savings survey, and it also lists those accounts that have achieved Which? Recommended Provider status.

Which? Recommended Providers are companies that have both been rated highly by customers and offer products that meet the exacting standards of our expert researchers.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Money Compare is a trading name of Which? Financial Services Limited.