Savings, high demand, poor supply?
Low interest rates and aggressive monetary stimulus might be beneficial to businesses and consumer spending, but savers appear to be the big losers. Instant Access accounts interest rates are at record lows, yet savers, as illustrated in the chart below, are looking to increase their deposits after years of steady declines.
Source: Office of National Statistics.
Assessing the different savings rates.
However, a distinguishing feature of this recession is the combination of record low interest rates, huge monetary stimulus and recapitalisation of the Banks and Building Societies. This has had several important effects on the savings market as illustrated in the graph below. The graph shows the average rates for all maturities in Fixed Rate Bonds and Cash ISA’s.
Source: ONS, Bank of England, Building Society Association.
The first and most obvious aspect to note is that despite previously having a high correlation the margin between Fixed Rate Bonds and Cash ISA’s is considerably wider than at any point in the last ten years. Banks and Building Societies want substantial deposits on longer maturities and Cash ISA’s are currently limited to £3,600.
A second important consideration is the current spread of Fixed Rate Bonds over Bank of England interest rates. Although in absolute terms Fixed Rate Bonds appear unattractive on a relative basis Banks and Building Societies are currently offering attractive rates. One year bonds are currently offering up to 3.70%, several five year bonds are offering interest rates greater than 5%.
Finally, average Fixed Rate Bond rates appear to be declining. Throughout 2009 the average rate increased. Depositors should be aware that Banks and Building Societies often offer special terms for specific reasons and investors should check the security of institution, their eligibility for the Financial Services Compensation Scheme (FSCS), before picking the best rate.
Lock up, but for how long?
No one wants to have their savings locked into a rate during rampant inflation or interest rate rises.
As we have written before (The Reserve Bank of Australia 16/10/09). we do not believe that uncontrollable inflation is a concern in the near term, over 1-2 years, as inventory levels are still a significant downward pressure on prices and M4 money growth is still currently poor despite the monetary stimulus. As such we feel that 1-2 year Fixed Rate Bonds are more attractive as rates are roughly only 1% lower than the best 5 year deals.
Overall, yields available from cash are below those that depositors can make through investments, however, the current situation is not as bad as many fear, and provided investors do not demand instant liquidity Fixed Rate Bonds offer attractive rates.
For more information on the best rates available go to our Income rates website or you speak to one of our Advisers on 020 7189 9999.