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Savings Accounts to Beat Inflation

While the outlook for inflation is rising, interest rates on cash savings accounts are falling leaving many investors with a negative real rate of return

Karen Kwok 16 November, 2016 | 4:40PM

Inflation fell to 0.9% in October, from 1% the previous month, according to the Office of National Statistics.

Only 229 of the 636 standard savings accounts in the market can now beat 0.9%

The consumer price index (CPI) measure of inflation was widely expected to be 1.1%, and the fall was largely due to the short-term impact of falls in the clothing market and university tuition fees, which rose by less than they did a year ago. The ONS also said falling prices for certain games and toys, overnight hotel stays and non-alcoholic beverages also contributed to the reduction in inflation.

But the fall bring only temporary relief according to Bank of England Governor Mark Carney, who told the Treasury Committee on Tuesday that he believes inflation will accelerate in the coming months as weaker sterling raises the price of imported goods.

David A. Meier, economist at Julius Baer echoed that statement, saying that inflation looks set to rise significantly.

“The pass-through of higher input prices, due to the soft currency, to consumer prices has seemingly yet to unfold fully, as retailers are so far stemming the burden via lower margins,” said Meier.

“The producer prices output index surged to 2.1%, suggesting that the abovementioned pass-through is indeed materializing.”

Inflation is forecasted to grow to 4% in 2017 according to a report published by the National Institute for Economic and Social Research earlier this month.

Less than Half of Savings Accounts Beat Inflation

While the outlook for inflation is rising, interest rates on cash savings accounts are falling leaving many investors with a negative real rate of return.

Only 229 of the 636 standard savings accounts in the market can now beat 0.9%, showing how poor cash savings have become, data provided by Moneyfacts.co.uk revealed.

“Over the last 12 months persistent rate cuts and removals of some of the best deals have made it increasingly difficult for consumers to find an account which will provide a decent return,” said Rachel Springall, finance expert at Moneyfacts.co.uk. In October, Moneyfacts.co.uk recorded 25 only saving rates rises, while 240 accounts cut rates

“Savers shouldn’t delay looking for a better deal and should consider taking advantage of the best rates on offer now,” said Tom Adams, head of research at Savingschampion.co.uk the online savings adviser.

“In the current climate savers may like to consider a balanced savings portfolio, with a mix of current accounts and fixed rate accounts to get the highest possible interest rates now, alongside variable rate accounts that could be used to take advantage of increased rates, as and when that happens,” said Adams.

Where Can Savers Find the Best Saving Rates?

Springall said that it is unlikely savers are going to see any improvement for quite some time due to the lack of appetite providers have for savers deposits.

Together with a lower for longer interest rates outlook, savers therefore may want to look at fixed rate account for a longer term.

Secure Trust Bank is paying a fixed 2.01% over five years and the account can be opened online, data provided by Moneyfacts.co.uk showed. Interest is paid yearly and there is a £1000 minimum investment requirement.

Those looking for instant access to their cash in times of uncertainty can consider easy access accounts and cash ISAs.

For easy access accounts, RCI Bank and National Savings & Investments pay 1% rate. RCI bank freedom savings account takes from a minimum of £100 up to £1000000 savings. National Savings & investments income bonds account accepts a minimum of £500 up to £1000000 savings while interest is paid monthly only.

For Cash ISAs, Coventry Building Society easy access ISA pays rate of 1.1%. Transfers from previous tax years’ ISAs are not allowed however.

Shawbrook Bank five year fixed rate cash ISA bond pays a rate of 1.45%. However the deal comes with a minimum £5000 investment requirement up to £250,000.

For high interest current accounts, TSB bank classic plus account offers 4.9% saving rates now until January 2017. Since then the rate is being reduced to 2.9% on balances up to £1500. To qualify, £500 of new money must be deposited into the account each month and you must register for internet banking and paperless statements. Interest can only be earned on a maximum of £2,000.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk