The cost of living is at its lowest level for several years, giving respite to savers who have felt the pinch from interest rate cuts.
The latest inflation figure is due out next week, and while there is still a question mark over whether the Consumer Prices Index (CPI) – the official cost of living – will have risen or fallen, the Bank of England has suggested it will remain low for some time.
Indeed, Mervyn King, governor of the central bank, said in the most recent inflation report that he expects inflation to fall below 1% in the future. The CPI hit 1.8% in June, the first time it has fallen below target since 2007.
Not everyone is convinced that low inflation is here to stay; the Bank of England’s quantitative easing measures (which have seen it pump £175 billion of new money into the economy) pose the risk of rocketing inflation in the years ahead. And when the rate of VAT returns to 17% at the start of 2010, the cost of living is expected to spike.
However, Charles Davis, economist at the Centre for Economic and Business Research says: "Even assuming the base rate remains at 0.5% until the end of 2011, the Bank of England expects inflation to undershoot the target rate until the final quarter of 2011."
So, what does this environment of low inflation mean for savers? For one thing, it suggests that the Bank of England base rate – that is, the official rate of interest – will remain low for some time.
Vicky Redwood, UK economist at Capital Economics, explains: “Even if quantitative easing is not extended any further, the clear message from the inflation report was that a policy tightening is a long way off. We continue to expect monetary policy to remain extremely loose for the rest of this year and next year too.”
The base rate is currently just 0.5%, having been cut dramatically at the end of last year and during the first months of 2009. On the face of it, this is bad news for savers as savings accounts have had their headline rates chopped dramatically in response.
However, Kevin Mountford, head of banking at moneysupermarket.com, says things are not as bleak for savers as they may think.
For a start, although the base rate is currently just 0.5%, the average fixed-rate account paid 3.03% in July - that’s 2.53% above base. In comparison, the average fixed-rate account paid 6.06% in July last year, which was just 1% above base. The previous July, both the base rate and the average fixed rate were 5.75%.
The gap between base rate and savings rates can be seen in the instant access market too. While the average account is currently dire, at just 0.15%, the best-paying deal - Coventry Building Society’s postal account, which pays 3.3% AER – is 2.8% above base.
In addition, low inflation is good news for savers, as it technically means your money goes further, although the benefits of this might be wiped out by the impact of the credit crunch and recession on your finances.
When it comes to making the most of low inflation and beat dismal savings returns, it’s vital you consider the best rates on the market rather than put up with your current deal. However, rate is not everything, and savers should be careful to look at the features of savings accounts to make sure they are suitable for them.
"Many of the highest easy access rates include introductory bonuses, usually for 12 months, and some also restrict withdrawals,” warns Mountford. “This doesn't mean you should steer clear of such deals - just make sure you adhere to the terms and conditions and in the case of bonuses, move your money once the introductory offer ends. "
GREAT FIXED-RATE DEALS
|Provider|| Five |
| Four |
| Three |
| Two |
| One |
|West Bromwich BS||5.45%||-||4.75%||4.45%||-|
| Birmingham |
THE BEST EASY ACCESS DEALS
|Coventry BS||3.3%|| * Rate includes 1.3% bonus |
* Only four withdrawals a year
|Egg||3.25%||* Rate includes 2% bonus|
|Alliance & Leicester||3.15%||* Rate includes 1.65% bonus|
|Birmingham Midshires||3.15%|| * Rate includes 2.65% bonus |
* Access is via telephone only
|ING Direct||3%||* Rate falls to 0.5%|