Static base rate and falling inflation provides good news for savers

There have been two key announcements last week. The Bank of England held the latest Monetary Policy Committee (MPC) meeting and voted to keep the base rate at 5.25%, as was widely anticipated.

The day before, the Consumer Prices Index (CPI) measure of inflation was announced - 3.4% in the 12 months to February, down from 4% in January. This was lower than expected, and at its lowest level since September 2021 when it was 3.1%. Of course, as we have to keep reminding ourselves, this doesn’t mean that prices are falling, it simply means that the cost of things are rising a little more slowly. Certainly a lot slower than in October 2022, when CPI inflation hit 11.1% - the highest level in 41 years.

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That said, depending on your lifestyle, there may actually be some items that are in your inflation basket that have fallen in price. For example, although the rising cost of bread has slowed from 2.1% in January to 1% in February, which means the price is still rising a little, the price of butter and jam has been falling! And with the price of milk falling too, it looks like breakfast is a pretty inflation busting meal right now!

The main downward drivers of CPI have been an ongoing slowdown in the rising cost of food and restaurants & cafes – the latter helped by a slowdown in the prices of some alcoholic drinks such as gin and whiskey.

Motorists are also seeing cheaper prices at the pumps, as the average price of petrol rose by 2.3p per litre between January and February 2024 to stand at 142.2p per litre, but down from 148p per litre in February 2023.

Diesel prices rose by 3p in February to stand at 151.3p, but down from 169.5p in February last year.

The ONS stated: “These movements resulted in overall motor fuel prices falling by 6.5% in the year to February 2024, compared with a fall of 9.2% in the year to January”.

Core inflation, which excludes the more volatile energy, food, alcohol and tobacco, rose by 4.5% in the 12 months to February 2024. But this is down from 5.1% in January.

Of course, lower inflation means that once more there is greater expectation for the base rate to be cut and traders are now pricing in a 63% probability of a 0.25% rate cut in June. However, the Bank of England has indicated that it cannot start cutting rates yet, given stubbornly sticky growth in services' prices and wages, warning of the possibility of inflation remaining higher for longer.

What should savers do?

The good news is that whilst it feels like savings rates may have peaked recently, the top rates available have been pretty stable. So, this combination of stable savings rates with a drop in inflation means that there are many accounts available that are paying an interest rate that is higher than the current level of inflation, even if you now pay tax on your savings interest.

The top easy access account is paying a gross rate of 5.10% at the moment. After the deduction of 20% tax, the rate falls to 4.08%, but that rate still beats the CPI level of inflation which has fallen to 3.4%. Of course, that rate is variable, so could well start to drop once the base rate does, so if you can afford to tie some cash up, now could be a good time.

The top 1-year bond is paying 5.26% - which is 4.21% after 20% tax. And although longer term bonds are paying less, this is a clear indication that the market expects rates to start to fall soon, so locking in now for longer at a lower rate could see you earning more in the long run – and if inflation continues to fall, you could hedge against inflation for the duration. The top 5-year bond is paying 4.55%, which is 3.64% after 20% tax – still higher than CPI.

And, don’t forget that there is a £20,000 ISA allowance, which can shelter your savings from the taxman. The top easy access ISA account is paying 5.15% tax free/AER with app-only and new provider, plum, whilst the top paying 1-year cash ISA is paying 5.09% with Castle Trust. There is also the Virgin Money 1 Year Fixed Rate Cash ISA Exclusive Issue 11 which is paying 5.25% but you need to hold or open a current account with Virgin to be eligible – although you don’t need to switch current account or set up any direct debits. The top 5-year ISA is with UBL paying 4.16% tax-free.

Of course there are still a number of accounts that are paying less than inflation. Whilst closed to new business, the Virgin Money Access Saver account is still paying just 0.25%. And Barclays live Everyday Saver account is paying between 1.16% to 1.66% AER – the latter applying to the first £10,000 deposited only.

If you have £10,000 in an account earning 0.25%, with inflation at the current level of 3.4%, after one year, although the total balance including accrued interest would be £10,025, the real value after the effect of inflation would have reduced your spending power to £9,695. However, if you picked the top paying easy access ISA paying 5.15% tax free/AER, not only would the total balance have increased to £10,515 after a year, but more importantly the real value would have grown too – giving you spending power of £10,169, so more than keeping up with inflation.

This illustrates just how important it is to pick the top paying accounts. So keep a close eye on Savings Champion best buy tables. 

Take a look at our inflation calculator below, to see how your savings accounts are faring against inflation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice. 

The accounts and rates mentioned in this article are accurate and correct as the time of writing 22/03/2024.