UK Savings Alert: Inflation Outpaces Interest Rates After BoE Cut

UK consumers are confronting the prospect of their savings’ real value being eroded by inflation for the first time in nearly two years. This shift follows the Bank of England’s (BoE) recent decision to cut its base interest rate, a move swiftly mirrored by numerous high-street banks. The confluence of declining savings yields and an unexpected surge in inflation signals a challenging economic environment for those dependent on interest income.

On August 7, the Bank of England reduced its base interest rate by 0.25 percentage points, setting it at 4%. This adjustment prompted over 20 savings providers, including major institutions like NatWest, Chase, and Santander, to lower the rates offered on customer accounts. The speed with which these reductions were implemented contrasts sharply with the slower pace observed when rates were increasing, a point of past criticism from government officials regarding banking practices.

• UK consumers face savings erosion due to inflation, a first in nearly two years.
• The Bank of England cut its base interest rate to 4% on August 7.
• Over 20 savings providers, including major banks, swiftly lowered their rates.
• This rapid reduction in savings rates contrasts with slower increases seen previously.
• The economic environment is challenging due to declining yields and rising inflation.

Inflationary Pressures and Real Returns

The core concern for savers stems from inflation, which unexpectedly climbed to an 18-month high of 3.6% in June. The BoE now forecasts inflation could peak at 4% by September. This projection means that a significant portion of variable-rate savings accounts will offer returns below the inflation rate, effectively diminishing the purchasing power of accumulated wealth. Data from the financial intelligence firm Moneyfacts indicates that the last period when average savings rates consistently fell below the Consumer Price Index (CPI) inflation was in October 2023.

While the BoE’s base rate cut was 0.25 percentage points, some banks implemented more substantial reductions for their account holders. For instance, between August 7 and August 12, Atom Bank lowered its Instant Saver Reward account rate by 0.58 percentage points, from 4.51% to 3.93%. Similarly, OakNorth Bank reduced its 20-day notice account rate by 0.34 percentage points to 3.78%, and Skipton cut its Cash ISA Saver and Children’s Trust Saver by 0.5% each. Larger banks, however, generally applied more conservative adjustments, such as Santander’s 0.10 percentage point cut on its Junior ISA and NatWest’s 0.25% reduction on its cash ISA.

Broader Economic Context and Outlook

For borrowers, particularly those on variable-rate mortgages, the recent rate cut offers some respite, though its broader impact is anticipated to be gradual. The average two-year mortgage rate, for example, dropped to 4.99%, signaling increased competition among lenders. Despite inflation running above the Bank’s target rate (typically around 2%), the BoE cited weak economic growth and emerging concerns in the labor market as key factors influencing its “finely balanced” decision to lower interest rates. The Monetary Policy Committee’s latest session demonstrated a lack of unanimity, leaving the timing of any further rate reductions uncertain.

In this evolving economic landscape, financial analysts advise savers to remain vigilant regarding their account rates. While the immediate inclination might be to switch providers in search of higher yields, experts caution that new providers may also soon adjust their rates downwards. For those holding variable-rate accounts, continuous monitoring of rates and understanding the terms of their savings products is crucial to mitigate the impact of inflationary pressures on their financial assets.