Returns from savings accounts swallowed by inflation but security remains key

15 October 2008 / by Rachael Stiles
Savers are seeing returns from their investment eaten up by soaring inflation, but finding a safe haven for their money remains a top priority amongst global economic turmoil.

Inflation is now at 5.2 per cent – more than double the Government's self-imposed target of two per cent – which surpasses the average return from savings accounts.

Since the credit crisis took its toll on banks' stability and savers started fearing that their money was not safe, their priorities have shifted away from finding the best rate possible, moving towards finding a savings account where their money will be protected.

The collapse of a number of banks, such as online savings account provider Icesave, which was known for its market leading interest rate, has seen savers' focus shift to banks that are perceived as being strong enough to weather the economic storm.

The Government has now upped the compensation for consumer savings from £35,000 to £50,000, but savers continue to seek security in Northern Rock and Bradford & Bingley savings accounts – both of which offer a 100 per cent guarantee because they are nationalised – and the government-backed National Savings & Investments.

"Chasing the top rate of interest in the near future will not be high on the list of priorities for the 300,000 thousand or so Icesave customers eagerly waiting to find out when they are likely to be reunited with their nest eggs." predicts Andrew Hagger from Moneynet.co.uk.

He continued: "Even for those not directly caught up in the Icelandic banking catastrophe, recent events will have damaged people’s confidence and see many more savers choosing safer option, even if it means accepting a rate on an account that doesn’t figure in the best buy tables."

Savers will find it almost impossible to find a savings account which earns interest once inflation and tax have been taken into account, says Michelle Slade, analyst at Moneyfacts.co.uk.

Whereas savers have been benefitting from the price war among savings account providers since the credit crunch highlighted the importance of building up savings deposits, the tables are now turning, especially after the half a percentage rate cut from the Bank of England last week.

"The Bank of England cut base rate as part of a move to kick start the housing market, but it has come at the expense of savers as inflation jumps to its highest level in six years." Ms Slade commented.

"Until inflation is brought back under control, savers need to make the best of a bad situation." she continued, urging that they compare savings accounts in order to "achieve the best rate possible for their money," and "limit the effect that inflation will have on depleting the value of their money."

© Fair Investment Company Ltd