Savings back in favour, but NS&I left out in the cold

The government and Bank of England will be breathing a sigh of relief that the huge withdrawals from savings accounts that we saw in May weren’t replicated in June. While households withdrew £3.4 billion of money from savings accounts in May, there was a huge turnaround to £3.1 billion of inflows in June. Part of the Bank’s plan to reduce inflation is that people are nudged to save more of their money rather than spend it, meaning May’s outflows were their worst nightmare. But this year has taught us that the data can change on a knife edge, so Rishi Sunak will be wise not to rejoice too enthusiastically just yet.

Once again people were flocking to fixed-rate accounts, with £6.6 billion deposited in them during June, as people snap up higher rates on one-year fixes. But there is still a huge chunk of money sitting in accounts earning nothing. In fact the total amount in these accounts increased in June, rising from £250 billion to £270 billion. This puts it near the peak of £273 billion that we saw in September last year. It highlights that there is still a huge amount of work to do to encourage savers to move their money to accounts paying a decent rate. Shopping around is a bit of hassle, but if you’re looking at a difference between earning 0% or north of 4.5% on your savings, it’s worth a few minutes work.

Savings rates improving

The gulf between Base Rate hikes and the increase in interest on easy-access accounts is also highlighted by the Bank’s figures. The average easy-access account was paying just 0.09% before the Bank started its current rate hiking cycle at the end of 2021, and has only increased to 1.46% in June – despite Base Rate having risen by 4.9 percentage points since then.

However, there are some signs that the government’s pressure on banks to pass on more of the interest rate rises is starting to work. The interest rates paid on these easy-access accounts has risen from 1.12% at the end of March to 1.46% today. While still far cry from Base Rate of 5%, it’s a sign that naming and shaming the banks may be pushing them to raise rates across all savings accounts, not just the best buy options.

NS&I to raise rates

We’ve already seen lots of interest rate rises from NS&I but more will surely be coming, as the government-backed savings provider saw another drop in flows in June. With interest rates rising across most other savings providers, NS&I is struggling to keep up and attract enough assets. In June any money they did draw in was wiped out by flows going out, meaning no net new inflows. This is a drop from the £800 million of inflows they saw in May and is the third month of falling inflows.

Taking a punt on Premium Bonds was a more attractive gamble when interest rates were rock bottom, but savers now are giving up 4.5% or more on an easy-access account for the chance they might win big on Ernie, which is a tougher call to make.

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