Few signs of comfort for savers

Interest rates have been at a record low since March

A spike in inflation will hit savers already suffering from low interest rates.

Higher inflation levels will mean that savers' funds in regular accounts will be eroded as the Bank rate remains at a record low of 0.5%.

Some commentators are suggesting that savers pay off debts instead or shift some of their money to stock market-based investments.

But low mortgage rates are continuing for those with tracker deals.

Inflation view

In the Bank of England's quarterly inflation report, Bank governor Mervyn King said that the UK's inflation rate would rise above 3% in the coming weeks, but would then quickly fall back below the 2% target.

Even when rates do start to pick up, some providers will use the opportunity to restore their profit margins and will not pass the full benefit on to savers

Andrew Hagger, Moneynet

Financial information service Moneyfacts said that a higher inflation rate would erode savings in real terms.

If £1,000 was put in a typical instant access account with an interest rate of 0.73%, and with the current inflation rate at 2.9%, then the rate of return would be -2.3%.

The same amount put in an average two-year fixed-rate deal would see a -0.13% return, but there would be a positive return of 0.65% if that amount was put in a five-year fixed-rate deal.

However, long-term deals would not necessarily be the best option for some people.

Christine Ross, of SG Hambros, said that some people needed accessible savings for a rainy day. She said many would turn to paying off high-interest debts such as credit cards or invest in stock market-based funds instead.

Long-term issue

Separate research from Moneysupermarket.com showed that eight of the top 10 best-value savings accounts have been pulled since the beginning of January.

"This sudden fall in savings rates will have caught many by surprise, and coupled with December's unexpectedly sharp rise in inflation means 2010 looks like it may be a difficult year for savers," said Kevin Mountford, head of savings at Moneysupermarket.com.

"There has been a good deal of public debate around the treatment of savers recently, but these moves seem to suggest things will not be getting much better in the near future for this marginalised group."

Andrew Hagger, of Moneynet, said that account providers were also taking a hit from the low interest rate climate, which would extend the difficulties for savers trying to find good deals.

"Until the base rate starts to increase, there is no prospect of savers seeing any meaningful increases on the paltry interest returns they are currently receiving," he said.

"Even when rates do start to pick up, some providers will use the opportunity to restore their profit margins and will not pass the full benefit on to savers."

However, low interest rates mean that people who can raise a decent deposit are finding particularly good deals in the mortgage market.

Bank of England statistics show that the average rate for a tracker deal with a 25% deposit was 3.63% at the end of January - the lowest since records began in 1997.

A two-year fixed-rate deal with a 75% loan-to-value had an average rate of 3.97%, the lowest since July 2003.

The average standard variable rate (SVR) for the end of January also stood at 3.97%, the Bank said.