Savings rates are languishing behind inflation, meaning millions of savers could be losing money by leaving it in their bank accounts.
Inflation rose slightly to 3.6 per cent in June, up from 3.4 per cent in May.
High inflation is bad news for savers as it erodes the value of money held in cash.
If prices are rising by 3.6 per cent, savings need to earn at least 3.6 per cent in interest on their cash to maintain the same buying power.
But the average savings rate currently sits at 3.51 per cent, according to data from Moneyfacts.
This also takes into account all savings rates, including fixed rates, which typically offer higher rates than easy access accounts.
The average rate for easy access accounts fell to just 2.68 per cent this month, Moneyfacts data shows – considerably below inflation.
Meanwhile, easy access ISAs – where savers do not pay tax on the interest earned – now typically offer 2.92 per cent interest.
“Savings rates have eased back dramatically following four rate reductions from the Bank of England since last summer, so the latest uptick in inflation is another blow for real returns,” said Alice Caine, personal finance analyst at Bestinvest.
“While higher inflation has the potential to slow the disappearance of the top savings rates, provided the pace of interest rate cuts slows, the downside is that higher inflation eats into savers’ returns.”
The Bank of England uses its base rate to control interest rates, increasing it if inflation rises and lowering it if it falls.
The Bank has been gradually lowering its rate over the past year as inflation has come down, meaning high street lenders have reduced their savings rates.
But over the past few months, inflation has stubbornly stayed well above the Bank’s two per cent target, prompting the Bank to hold rates at 4.25 per cent in June.
Yet experts are anticipating further rate cuts in the year and banks have been pricing this in, meaning interest rates on the high street have continued to fall.
What savers can do about it
The best way to beat inflation is to move your money to a top-paying account.
According to Moneyfacts, there are currently 1,289 savings accounts that beat inflation. The majority of these (636) are fixed-rate bonds, but there are still 119 easy-access accounts with higher rates.
The best easy-access rates are as follows:
Top easy access saver is with Chase Bank at 4.89 per cent, which includes a 2.25 per cent bonus for 12 months. Top easy access cash ISA is with Plum, at 4.92 per cent.“With savings rates likely to ease back even further in the months ahead, scouring the market for the best deals possible can help to extend that inflation-beating return,” Ms Haine said.
If you are able to lock your money away for a period of time, you can typically get a higher rate.
The average one-year fixed bond rate hit 4.03 per cent this month, Moneyfacts said.
A one-year fixed bond means you can’t withdraw your money for one year, but in exchange, you get a fixed rate for the whole period.
Sarah Coles, head of personal finance at Hargreaves Lansdown, added: “Anyone considering fixing a savings rate should do so sooner rather than later, while there are some strong deals around.
“They should avoid settling for average too, because there are much better rates available among online banks and savings platforms.”
Savers could also consider investing their money to beat inflation, if they are able to invest it for at least five years.
According to research by Fidelity, if you had invested £1,000 in a world tracker fund on New Year’s Eve 1999, you would now be sitting on around £5,000, while if you had opted for cash, you would have £1,700.
Dean Butler, managing director for retail direct at Standard Life, said: “Those willing and able to accept an element of risk could consider investing for a better chance of substantial returns above inflation, perhaps through a tax efficient product like a stocks and shares ISA or, taking a longer-term view, a pension.”
What’s next for inflation and interest rates?
The Bank of England has hinted that it intends to cut interest rates in August, but experts say the latest inflation figures could cast doubt on these plans.
“If the return of higher inflation becomes a trend, then the Bank might find it hard to keep lowering rates at a decent clip,” said Dan Coatsworth, investment analyst at AJ Bell.
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