NS&I has announced that it will increase its direct saver and income bonds rates from 0.35 to 0.5%
From Thursday 10 February, the rates will increase by 15 basis points.
The government-backed bank said that this will help it to meet its net financing target for 2021/22, which is set at £6bn ($8.14bn), in the range of £3bn to £9bn.
This is the second time that interest rates for these products have increased in the past few months, as they were at 0.15% before they went up to 0.35% in December.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said that the change was “hugely positive,” but that it still fall short of the top rates being offered on the market.
She highlighted that the best easy access savings rate available at present is 0.71%.
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“Savvy savers willing to shop around can still find better places to stash their cash,” she said. “They may prove tempting for those with very large amounts of savings who welcome the extra protection offered by Treasury. You can hold up to £1m in income bonds and £2m in the direct saver, and it’s all protected by the Treasury.
“It’s worth saying though that the first £85,000 held with any institution is protected by the Financial Services Compensation Scheme so this will cover most people.”
At the same time, Morrissey welcomed increasing saving rates in response to the Bank of England’s (BoE) decision to raise interest rates to 0.5% on 3 February — the second increase since the beginning of the pandemic and the first back-to-back hike since 2004.
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“While still far from market leading, they are a vast improvement on rates that went as low as 0.01% for some of its products and sent customers rushing to the exit,” Morrissey said.
Previously, mega-low rates meant that NS&I missed its fundraising target for 2020/21 by a significant margin. Given that during the second quarter it had only raised £600m of its £6bn target for this year, it’s not surprising that strong action has been taken.
Similarly, Myron Jobson, senior personal finance analyst at Interactive Investor, said that while the bumper rates were nothing to shout about, “it is good form from the Treasury-backed bank as many others have appeared uninterested in raising theirs from ultra-low levels.
“NS&I was widely viewed as the last bastion of competitive savings rates in the UK amid the era of rock bottom interest rates, before slashing its rates sharply in November 2020 to low levels offered by high street banks — losing fans in the process.
“The hope now is that many banks will feel pressured to follow suit. Whether this will come to fruition remains to be seen.”
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The current high rate of inflation means that most people’s savings are losing value which is why so many are shopping around for the best deal.
Jobson recommends that those who can afford to put money away for five years or more should consider investing for the potential of inflation beating returns which far outstrips savings rates.
He added: “Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach.”