It’s not all gloom for savers

With base interest rates at their lowest since records began and with banks and building societies slashing the rates on their savings accounts also to new lows, now may not seem a great time for the prudent saver.

Recent data from the Bank of England has shown that in January notice savings accounts were paying out an average of just 0.29 per cent, down from the average of 0.9 per cent that was being offered in December.

Instant access accounts have also been hit by the slide in the Bank of England’s base rate. Last month the average instant access savings account was producing a return of just 0.51 per cent compared with the 0.81 per cent of December and the 2.77 per cent that was being paid a year ago.

Isas, too, have suffered, dropping to an average rate of 1.38 per cent, a plummet in value from the 5.06 per cent they were producing in January 2008.

Fixed rate bonds have not been spared either, with their average rate of return sliding to 2.35 per cent last month. As recently as October 2007, fixed rate bonds were delivering returns of 6.15 per cent.

That said, however, it is not all bad news for savers. Quite the reverse.

The reason is inflation, which, like interest rates, is crumbling to all-time lows.

The real value of money is the spending power it affords. When inflation was high, it was borrowers who benefited since the rise in the cost of living chipped away at the value of their debts. Savers tended to lose out because inflation dampened the power of their cash to buy things.

But with the Retail Prices Index at 0.1 per cent, anyone who saves their money will be seeing a better return than the paltry interest rates delivered by their accounts tend to suggest. This is because inflation needs to be subtracted from those interest rates before the spending power value of their money can be calculated.

Conversely, borrowers, such as mortgage holders, should seize the opportunity of the low cost of living to pay off more of their debts as inflation is no longer whittling away at the value of their borrowing.

While savers may be lamenting interest rate accounts that are approaching zero, they should perhaps look back to the 1970s when inflation was rampant. Then real returns on money slipped to minus 14 per cent despite the relatively high rates of interest.

It has been estimated that, with rates as they stand at the moment, the actual return savers are receiving is close to 2.2 per cent, well above the rates that many accounts are currently offering, a figure that is the result of subtracting the RPI from the average of interest rates offered by banks and building societies.