Fixed rate bonds take inflation hit Go compare with our comparison table

Fixed rate bonds take inflation hit

21 April 2010 / by Lois Avery

Fixed rate bond rates are set to take a hit following yesterday's announcement that inflation has risen to 3.4 per cent.

The news that the rate of inflation had jumped unexpectedly in March came as a blow for regular savers as they learned that in order to break even they would need to invest in accounts with rates as high as 5.4 per cent, which do not currently exist.

And now the news looks set to worsen for savers seeking shelter in fixed rate savings accounts. The best buy rates on offer for fixed rate bond accounts have already tumbled by up to 19 per cent in six months and the situation looks set to deteriorate over the next few months.

Andrew Hagger of explained: “Whilst base rate has remained constant, unfortunately the same can't be said for the best buy rates on offer in the fixed rate bonds market.

“The first fourth and fifth year best buy rates have been hit hardest with reductions of 0.75 per cent, 0.65 pre cent and 0.65 per cent respectively during the last half year. So not only is inflation taking a bigger bite out of savers spending power, the rates on offer have tumbled by up to 19 per cent.”

The figures, released by show that someone investing £50,000 in a one year bond with NS&I at 3.95 per cent last October would have accrued gross interest of £1975. But someone opting for the current best rate of 3.20 per cent from Kent Reliance Building Society today would make just £1600 on their investment – more than £300 less.

The position for longer term savers is equally bleak, whereas six months ago you could have got 5.65 per cent from Yorkshire Bank and earned £14125 on your £50,000 investment before tax with a five year bond, the best rate on offer today is 5 per cent from State Bank of India, which would produce just £12,500.

Even savers looking to tie up their ISA allowance in a fixed rate bond will be left in the cold after a number of ISA rate cuts over the last few weeks, as well as the reluctance by institutions offering the best rates to accept transfers.

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© Fair Investment Company Ltd

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