This week National Savings and Investments (NS&I) announced a substantial increase in the interest rates that they are offering to depositors. Today’s announcement by the Monetary Policy Committee that interest rates were again held again, at 0.5%, makes it an interesting time to review options for ‘cash’ deposits.
Changes in NS&I’s offering
NS&I are currently offering depositors up to 3.95% and 4.60% interest for deposits of 1 and 5 years respectively. At the beginning of October, the interest earned on the same products over the same time period was 1% and 2.60%. A competitive yield and as close as possible to a cast iron guarantee of capital. These products are simply another way for the Treasury to fund our national debt.
The effect on retail bank deposits
The question that retail bank managers must be asking themselves is: why would anyone invest with us, when NS&I’s terms are so attractive? This is particularly relevant for 1 and 2 year lock ups where the interest rates offered by NS&I are extremely competitive.
Fixed rate bonds in the market place have gradually been increasing their interest rates over the past year. The best 5 year fixed rate bond on offer today is 5.35% whereas in May that figure was 4.40%. Will these now have to increase further? This is not an easy question to answer, although usually you would expect this aggressive move to provoke a competitive response. However, bank managers might decide that they are unsustainable or unprofitable for them.
Where is the catch?
There is no catch as such – but depositors will have to sacrifice instant liquidity for the good rates. Those who want liquidity will find their options limited. Accounts that offer over 3% often have ‘bonus’ terms attached, i.e. a short term increase in the interest offered to boost the headline rate and attract customers. However, the interest rates on these accounts can be changed with minimal notice and after the ‘bonus’ has expired these rates are typically unattractive. Depositors should pay close attention to these accounts.
We endeavour to help you manage your deposits efficiently. Please see our Income rates section for a wide range of options for your cash.
If there is anything you wish to discuss regarding this article please call one of our Advisers on 020 7189 9999.