Better year for savers but returns still low

The Bank of England building in London
The Bank of England building in London
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CHALLENGER bank Aldermore is predicting a slightly better year for savers in 2014.

The bank, which provides savings accounts to personal savers and SMEs, said lower and declining inflation will mean returns are worth more.

Inflation fell to the Bank of England’s target level in December for the first time in over four years, backing its case to keep interest rates at a record low and giving the Government a boost ahead of elections next year.

Consumer prices rose 2 per cent on the year in December, the Office for National Statistics said, the slowest increase since late 2009 and down from 2.1 per cent in November.

Inflation peaked above 5 per cent in 2011, pushed up by soaring gas and electricity bills, and the consumer price index had exceeded the central bank’s 2 per cent target every month since December 2009.

Meanwhile, interest rates have been locked at 0.5 per cent since March 2009.

Simon Healy, managing director of savings at Aldermore, said: “Anyone looking to put money away in the last 18 months would have noticed how depressing the rates are.

“SMEs and consumers have had to put up with stubbornly high inflation, low interest rates and Government-backed schemes that have prioritised getting people spending rather than saving.

“It’s useful if you are looking to buy a house, but not if you’re planning for your retirement or just generally looking to put some money away for a rainy day.

“I expect these economic and monetary conditions to persist and therefore rates to stay low by historic standards although savers should expect to see an increase through the year in rates for long-term fixed term accounts, almost certainly led by the challenger banks.

“The economic recovery is just taking a hold, so I wouldn’t expect the Bank of England to increase rates in 2014, but let’s hope a further reduction in inflation and wage increases finally allow people to start thinking about putting away more.”

He welcomed the increase in the allowance for ISAs to £11,800 from April and urged savers to make sure they are making the most of their tax-free allowance.

Mr Healy explained why returns have been so stubbornly low.

“The Bank of England’s interest rates have remained at a record low of 0.5 per cent since March 2009 and in addition to this, initiatives to stimulate the economy including Help to Buy and the Funding for Lending Scheme have given banks access to a wider range of funding sources and in many cases, reduced the need for high levels of savings.

“This has meant borrowing costs have been reduced for the likes of homebuyers and SMEs, but has led to less competition and therefore lower rates across the savings market.

“In a nutshell, if banks are less reliant on money from savings depositors, then they are less likely to give generous rates for their accounts although challenger banks are currently offering some of the best deals available.”

He said good news for savers can only come in small doses in this environment.

Mr Healy said: “With an economic recovery taking hold, the Bank of England is unlikely in the early months to consider interest changes.

“This doesn’t help savers in the short term, but they should look out for improving market conditions and better rates, particularly on long-term fixed rate accounts.

“I would expect that all banks will yet again compete for the best rate around the end of the tax year and the so-called ISA season.”

He said the Financial Conduct Authority’s review into the cash savings market could provide a framework that makes savings easier and clearer to understand.

He added: “All people want is an account that gives them good returns, reliably and securely and with the minimum of effort – banking as it should be; unfortunately the market doesn’t always work in their favour.”

Mr Healy thinks it unlikely that the bank will increase its base rate in 2014.