False alarm: Inflation falls, but so do savings rates Go compare with our comparison table

False alarm: Inflation falls, but so do savings rates

14 July 2010 / by Rachael Stiles

Inflation has fallen slightly which could have given false hope to savers who could have benefitted, but savings accounts rates have also fallen, snatching away a chance of higher returns.

Moneyfacts.co.uk said that the small drop in inflation, to 3.20 per cent, has been counteracted by a continuing decline in savings account interest rates.

It was nearly an opportunity for a small celebration for savers, who have been suffering while the base rate languishes at its record low of 0.5 per cent, and inflation eats away at any returns they manage to earn.

But, their hopes have been dashed by simultaneously tumbling interest rates. The average one year fixed rate bond has fallen from 2.72 per cent in May, to 2.62 per cent in July, Moneyfacts says, while the return from an average five year fixed rate bond has fallen from 4.35 per cent to 4.12 per cent during the same period.

In the instant access savings arena, there's not really anywhere left for interest rates to go, it said, as they have already been bumping along rock bottom at 0.73 per cent for the past three months.

To prevent their money from losing value in real terms, savers who pay basic rate tax need a savings account that pays 4.00 per cent, while a saver paying higher rate tax needs one that offers 5.33 per cent.

Consequently, the average basic rate tax payer's savings pot will be eroding by 2.62 per cent a year, the financial information website has calculated.

Darren Cook, spokesperson for Moneyfacts.co.uk, said that the only thing to force interest rates up could be a rise in the base rate.

The VAT increase, due to be implemented in January 2011, could also stunt any longer term reductions in inflation, Moneyfacts said.

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