Categorized | finance, news

Inflation hits ZERO; NS&I to Drop Easy Access ISA Rate

There is a downside to the Bank of England setting their base rate so low for so long. When it’s next-to-nothing and the financial markets get used to it, it triggers trends. It’s those trends we see across the spectrum of the financial sector, reflecting that the 0.5% base lending rate has been with us now for above six and a half years.

Whilst it’s great for borrowers, it’s dismal for savers. Throw in an inflation rate of 0% (as the markets reported yesterday) and money in the bank is worth exactly what it says on your passbook. If you’ve £10 in a savings account today, unless the markets change dramatically, after tax it’ll be worth little more than a tenner this time next year.

One of the last bastions of upholding a semi-decent interest rate, NS&I, has dealt savers a “bitter blow”. From the middle of November, its ISAs will only offer 1.25% interest, a drop of a quarter of one percent.

ISAs are still here, but for limited dividends only

ISAs have long been a traditional savings mechanism for contractors, in particular for the dividend investment that these savings accounts accommodate. In an attempt to get more of the general public saving, the government opened up the full extent of ISAs to cash savers, too.

Prior to this change, the most anyone could deposit in cash was 50% of your total ISA allowance. For 2015/16, the maximum tax-free annual deposit into an ISA account is £15,240.

When you open your account, you can choose all cash, all dividend or the original half-and-half. So even after amendments, contractors still have a safe haven for their company dividends if they choose wisely from the outset.

However, the latest drop in easy-access ISA interest rates will do little to encourage the saving the government envisaged upon making all-cash ISAs available.

Would a raise in the BoE base rate help?

Just as it takes a while for banks and lenders to drop their rates in line with the BoE, the same is true for the knock-on effect of any increases.

Mark Carney, the Bank of England governor, has hinted that the base rate will rise sooner rather than later. But with each month that passes, pundits release bated breath as the Monetary Policy Committee confirms it’s sticking to its guns.

But the MPC’s decision may change after the next meeting. The Retail Price Index, upon which inflation is based, dropped by 0.1% in August (predominantly fuelled by fuel) to a flatline zero.

What does that mean? In theory, it means that if a bottle of milk cost you £1.25 in August last year, it still cost you £1.25 this August, too.

The BoE may well have been waiting for inflation to drop back to this point (or perhaps even see if it turns negative) before changing the base rate. But even if we get the long-awaited rise, don’t expect to see your savings interest rates rise any time soon.

Banks will not giveth before they receiveth

Before giving anything back, the banks will increase mortgage interest rates to get a positive cashflow, first. Only when those rates settle will savers see the benefit of a BoE rise in interest rates.

The savvy among you will have a lightbulb above your head right about now. That’s because another favourite savings mechanism for many contractors is investing in Buy-To-Let mortgages. If you feel your ISA isn’t performing as well it ought, perhaps a brick and mortar investment may offer a sounder platform for your future.

But don’t hang about for too long. Like I say, all lenders are watching Carney and Co. As soon as the base rate rises, so will mortgage interest rates. On your marks…

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