UK savers are facing increasing challenges as inflation continues to rise, diminishing the value of their savings. Inflation reached 3.6% in June, its highest level in 18 months, and is expected to climb to 4% by September, according to the Bank of England.
This presents a significant problem for those with savings, as the returns on their accounts may fail to keep up with the escalating cost of living.
The recent cut in the Bank of England’s base rate has contributed to a rapid decline in interest rates across savings accounts, further complicating efforts to maintain purchasing power. As reported by GBNews Mail, this situation is expected to worsen for many savers.
Interest Rate Cuts and Reduced Returns
In the wake of the Bank of England’s decision to cut the base rate to 4% on August 7, many banks have quickly reduced interest rates on various savings products. For instance, Atom Bank cut its “instant saver reward” account rate by 0.58 percentage points to 3.93%, more than double the reduction made by the central bank. OakNorth lowered its 20-day notice account rate by 0.34 percentage points to 3.78%, while Skipton Building Society slashed rates on both its Cash ISA Saver and Children’s Trust Saver accounts by 0.5 percentage points. Santander also reduced the rate on its Junior ISAs by 0.1 percentage points to 2.7%, and NatWest trimmed its rates on both Cash ISAs and Help to Buy ISAs by 0.25 and 0.2 percentage points, respectively.
These rate reductions are coming at a time when inflation is climbing. With inflation at 3.6% in June and expected to hit 4% by September, these rate cuts mean that the real value of savings is likely to decline unless savers can find accounts that offer higher returns than inflation.
Inflation Threatens Real-Term Losses
The threat of inflation is becoming increasingly significant for savers. As Rachel Springall from Moneyfacts explained,
“If inflation does rise to 4% as predicted, there’s going to be many savers who aren’t actually beating that on a variable rate. So it just shows you again that those real-term figures are going to be eroded.”
This means that even if savers are earning returns on their accounts, those returns may not be enough to offset the impact of inflation. The reality is that inflation is eating away at purchasing power, making it more difficult for savers to grow their money in real terms.
For instance, the last time typical savings returns fell below inflation was in October 2023, according to Moneyfacts data. As inflation rises, savers with variable-rate accounts will likely see their returns fall short of the cost of living, leading to a real-term loss of wealth.
The Challenge of Switching Providers
With interest rates on savings accounts dropping, many savers might consider switching providers in search of better returns. However, Springall cautions that this might not be an effective long-term strategy.
“Customers could shift their account now and then in a couple of weeks find that the new provider they went to is actually going to be cutting their existing customer rates. So it feels like that’s a bit of a waste of effort – she explained.”
This could leave savers feeling frustrated, as the potential gains from switching accounts are often short-lived in a rapidly changing financial landscape.
Speed of Rate Cuts Compared to Previous Increases
The speed at which banks have reduced savings account rates stands in sharp contrast to the pace at which they increased rates during previous base rate rises. In 2023, former Chancellor Jeremy Hunt criticized banks for being too slow in passing on the base rate increases to savers. This sluggishness in the past has now been reversed, as rate cuts have been implemented quickly, leaving savers with limited options to protect their savings from inflation.
