August magazine column
19/08/2020
James writes a monthly savings column for Essex based magazines, Beaulieu and Channels. This is a reproduction of his August column.
Interest rates on savings rising
The past month has seen a turnaround in the savings market. Having had three months of falling rates, which saw the best buy 1 Year rate fall from 1.60% in early March to just 1% in early July, we’ve witnessed a mini revival in the past week.
In a two week period, across the end of July and start of August, we’ve seen United Trust Bank increase their 1 Year rate to 0.85%, to 0.90%, then 1% to finally 1.10%, where it was briefly top of market. Similarly, Charter Savings upped their 1 Year to 0.91% before increasing to 1.05%. Secure Trust Bank initially launched a new 1 Year rate of 0.95% before announcing an increase to 1.16% just 24 hours later.
ISA rates also heading north
Rate rises weren’t just confined to 1 Year Fixed rates as we also saw increases in ISA rates with Charter Savings (0.71%) and Kent Reliance (0.70%) taking 1st and 2nd spot in the 1 Year ISA tables. Charter (0.92%) also went top of the 2 Year ISA tables with Secure Trust (0.80%) launching a new product taking second spot. We also saw increases in rates from Kent Reliance (up to 0.75%) and Hampshire Trust (0.70%).
NS&I driving increases
I believe this upward movement in rates is being driven by National Savings & Investments (NS&I), the government backed savings provider. NS&I currently offer the best no notice rates in the market across a number of their products. Their Premium Bonds pay a prize fund interest rate of 1.40%, their Income Bonds pay 1.16% and their Direct Saver 1%. Their Direct ISA pays 0.90%.
NS&I took in almost £20bn (£14.5bn net) of new money in the three months from April to end of June this year. To put this in context, Metro Bank got its banking licence in 2009 and has since grown to look after £15.6bn of savings.
What is happening is that banks who need to raise deposits to fund their lending activities are finding it hard to compete against NS&I and their backing by HM Treasury, which means that all funds invested with them are 100% secure, whereas other banks are reliant on the Financial Services Compensation Scheme (FSCS) which protects savings up to £85,000 per person per bank. This is forcing them to increase rates to attract savers.
Where are interest rates heading?
Much depends on what happens with NS&I. They have a net funding target for the year of £35bn with a range of £32bn - £38bn. They are on course to smash this so they will have to announce a rate reduction soon or HM Treasury will have to increase this target. I think a rate reduction is most likely and, given NS&I needs to give two months’ notice of this, I expect this to come sooner rather than later with September looking likely.
This means that any impact, of an NS&I rate cut, will be delayed. Therefore, I think we will continue to see some price increases from providers in shorter term rates (up to 2 Years). I don’t see a significant breakout from the levels we are currently at, but we may see the odd rate higher than where we are. If so, they are unlikely to last long so I’d recommend any savers interested in them move quickly to secure them.
£160 incentive to switch bank
Banks have long been keen to entice people to switch accounts and we’ve seen some great incentives for people to switch account historically. They all disappeared during lockdown but the first one has reappeared. Halifax Reward account is offering £100 to switch and you can also choose one reward each year, one of which is £5 a month cash. If you’re looking to switch bank account and could do with a financial boost, it’s certainly worth a look.