Is the interest rate rise good news for savers?

February 08, 2022

After more than a decade of low interest rates, the Bank of England (BoE) has suggested that it will continue to gradually increase its base rate. With savers suffering from low returns, is that good news?

In December 2021, the BoE increased its base rate from 0.1% to 0.25%. While still very low compared to the Bank’s base rate historically, it’s the highest it has been since the start of the pandemic in 2020. Interest rates have been low since the 2008 financial crisis, when the BoE reduced rates in a bid to support the economy. As the UK recovers from the pandemic, the base rate could steadily begin to climb.

While, on the surface, the rate hike looks like good news for savers, it may not be as positive as it first seems.

To start with, the interest you’re receiving on your savings may not have increased following the announcement. According to a Guardian report, five weeks after the BoE announcement just four financial firms had passed on the full rate rise to all, or nearly all, of their variable-rate savings account customers. So, you may not have seen a change in the interest your savings are delivering at all.

Why does inflation exceeding 5% reduce the real-terms value of your savings?

One of the key reasons behind the decision to increase the interest base rate was rapidly rising inflation.

In the 12 months to December 2021, inflation hit its highest rate for 30 years. The rate of annual inflation was 5.4%, which means that the cost of living has increased much faster than the BoE’s target of 2%. At the current pace of inflation, something that cost £1 last year will now cost £1.05. That may not seem like a huge difference but when it’s across all your spending, from holidays to electricity, it adds up and can place pressure on your finances.

Inflation doesn’t just affect your day-to-day budget either – it also affects the spending power of your savings.

While the money sitting in your account doesn’t decrease, its spending power does if the interest earned is lower than inflation. So, unless your savings are earning interest above 5.4%, they are losing value in real terms as you’ll be able to buy less with that money.

Again, it’s something that can seem insignificant when you first look at it. However, over a sustained period, it does affect the value of your savings.

The BoE’s inflation calculator demonstrates this. If you had £20,000 in a savings account in 2010, it would need to have grown to £26,225.20 in a decade to maintain its spending power. This is because the average annual inflation was 2.7%. Now imagine how much your savings would need to grow to keep pace with inflation of 5.4%.

So, what can you do to maintain the value of your savings? Investing could provide a solution.

First, it’s important to note that cash savings can still play an important role in your overall financial plan. For example, your emergency fund should be readily accessible in case you need it, so a cash account often makes sense, even if interest rates are low.

When does investing make sense as a strategy to beat inflation?

Investing can help your savings to grow at a pace that maintains or exceeds the rate of inflation. As a result, it can help you maintain or grow your spending power over time. However, it does come with risks.

The value of investments can rise and fall, and you will experience periods of volatility, so investing should be done with a long-term outlook. If you’re saving for goals that are more than five years away, whether that’s helping children get on the property ladder or planning for retirement, it can make sense. If your savings are for short-term goals, like going on holiday, investing may not be right for you.

This is because a long-term time frame gives the peaks and troughs of market movements a chance to smooth out. If you’re investing for a short-term goal, what happens if you need the money at a point when your investment values fall? It could mean you have to cancel plans or sell more units to achieve the same goal, which could have a knock-on effect for other goals.

If you already have a rainy day fund for unexpected costs and plan to save for more than five years, it is worth thinking about whether investing is appropriate for you. We understand that you may have concerns about investing and the associated risks, but we’re here to offer you support in understanding your risk profile, choosing investments, and reviewing their performance. Please contact us to discuss what steps you can take to reduce the effect of inflation on your wealth.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

What our clients say

The people we help are at the heart of what we do. Here are some of their testimonials.

I would highly recommend Darius and John. I’ve used a financial adviser previously and could never get in contact with them when I needed their help. Stratton Wealth Management have been excellent from the start. They are always available to talk, and they also don’t talk in financial jargon!

Dave Rigby -

A client since 2015

Having recently transferred my financial management to Stratton Wealth Management, I have been extremely impressed with the highly professional service I have received. I feel I have been fully involved in all decision making, and the company's highly skilled advisers have shown commitment and patience in any dealings I have had with them. I have also always found them to be easily accessible for any discussion I may require.

Denise Thornton -

A client since 2019

As a business owner and father of four children, finances are usually the last thing we think about. Stratton oversees and manages our finances, both in terms of advice for my business and our personal investments. It is comforting to know that our retirement, investment and life insurance planning has been taken care of. Darius and John are always so efficient in dealing with our affairs. As someone with no real understanding of the ins and outs, it has been fantastic to have experts giving us great advice and making sure our best interests are always the top priority.

Lee and Claire Parkinson -

Clients since 2016

Darius deals with my family’s finances and is a very trusted adviser. We meet a number of times a year, but I know I can call him any time if I have any questions. He is proactive, helpful and friendly!

Jonathan Dennis -

A client since 2019

I knew I needed to begin saving and planning for the future but didn’t know where to start. Stratton helped me to understand my finances and put together a savings plan that is affordable and works for me. I now have and an ISA and a pension, and whilst retirement is many years away, I have the peace of mind that I am saving for my future. I look forward to working with them for many years to come.

Martin Corrigan -

A client since 2016

I have been impressed with the advice and service provided by Stratton Wealth Management and have always found Darius to be approachable, dependable and highly professional in his approach. It is reassuring to be able to have such a high level of confidence and trust when it comes to financial advice.

Russell Jones -

A client since 2018

Many thanks indeed for your in depth report for my client Mrs H – it is most thorough and above all readable. This might sound particularly strange; however you may well gather that in my profession we see many such reports, and I often feel that if the adviser fills it with charts and graphs it evidences a level of research. In truth most of what is produced is readily obtainable from the internet.

I would like to thank you (and your organisation) for your prompt and professional attention to my requirements on behalf of my client. As a practice we shall definitely be putting Stratton Wealth Management on our “preferred supplier list".

Colin Dunstall, Donaldson Dunstall Solicitors -

A client since 2015