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Inflation is soaring: will savings rates increase in 2022?

Man putting a coin into a pink piggy bank

According to the Office for National Statistics, inflation is now running at 5.1% year on year. This means inflation is at its highest rate for more than 10 years.

So, will 2022 offer more misery for savers? Or will interest rates finally start to rise? Let’s take a look.

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How does rising inflation impact your savings?

If you have savings, rising inflation is very bad news. Put simply, a 5.1% inflation rate means that the value of your cash is decreasing by the same rate.

Of course, inflation is nothing new, but the current level of inflation is far higher than it’s been for a number of years. 

Until recently, it was relatively easy to protect the value of your savings. That’s because you could find an account paying a rate higher than inflation by comparing accounts.

For example, according to data from Moneyfacts, in December last year, there were 496 deals offering interest rates above the 0.3% inflation rate at the time. It was a similar story in December 2019, when 181 deals paid more than the 1.5% rate of inflation.

However, beating inflation with a normal savings account is no longer possible. Today, savings rates are pitiful, with the highest easy access account paying just 0.71% AER interest.

How has the savings market performed in recent weeks?

According to Moneyfacts, the savings market is ‘fluctuating’, with fixed bonds having improved over the past few weeks. Despite this, easy access accounts have become less generous after another market-leading deal disappeared last week. 

According to Rachel Springall, finance expert at Moneyfacts, savings rates have moved in recent weeks. She explains, “Inflation continues to take its toll on savers’ cash and may well do so for many months to come. Since the last inflation announcement, some of the top fixed-rate bonds have improved, but elsewhere some fixed-rate ISAs have worsened.

“Savers who prefer to keep their cash in a flexible account would have seen Aldermore paying a top rate of 0.75% on its Double Access Account withdrawn last week, which was the best top rate deal since the start of the year.

“Now the top rate is on the Online Flexi Saver from Investec Bank plc, which pays 0.71% and unlike the Aldermore deal, this account does not restrict withdrawals.”

Springall goes on to explain the best deals currently available, and how savers can maximise the return on their cash.

She says, “The top one-year bond now pays 1.41% as an expected profit rate from Gatehouse Bank, compared to 0.93% as interest for the ISA equivalent from Shawbrook Bank.

“Those looking at a five-year fixed deal can get 2.14% on a fixed bond from UBL UK, but only 1.75% as a top ISA rate from West Brom Building Society. If savers are comparing bonds and ISAs, then it’s vital they consider their Personal Savings Allowance foremost.”

Springall continues: “Challenger banks and building societies continue to dominate the top rate tables, and it is clear to see why savers need to act quickly to take advantage. Signing up to rate alerts and newsletters is wise as some deals don’t appear to have a lengthy shelf life.”

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Will savings rates rise in 2022?

While savings rates remain low, Moneyfacts’ Rachel Springall highlights how the Bank of England may hold the key to unlocking better deals for savers in future. She explains, “The murmurings of a base rate rise have quietened down since last month, but as inflation continues to rise, it’s only a matter of time before the Bank of England makes a move.”

In other words, if and when the Bank of England raises its base rate, savings rates are likely to head upwards. That’s because a higher base rate will make borrowing more expensive for lenders, which should increase competition for savers’ cash.

Are you looking for the best place to stash your cash? See our list of the top-rated savings accounts.

The post Inflation is soaring: will savings rates increase in 2022? appeared first on The Motley Fool UK.

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