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Interest rates: ‘Worst time’ for saver since 1977 inflation wipes out spending power | Personal Finance | Finance


The base rate, which lenders use as a benchmark for interest rates, is now at a 13-year high of one percent.

This is the fourth increase since December and comes amid the rising cost of living, and soaring inflation.

However savers have been warned they “won’t see any benefits” as inflation is currently locked in at seven percent, and is only predicted to keep increasing.

Steven Cameron, Pensions Director at Aegon warned: “While this could provide a small boost to cash savers if the rise is passed on to saving accounts, any benefit in purchasing power will be wiped out many times over by rocketing prices, with the most recent inflation figure of seven percent at a three-decade high and expected to rise further. Those in cash savings paying one percent interest are losing a huge six percent a year in purchasing power.

“Aegon analysis of inflation and interest rates over the last 50 years shows that people are losing more purchasing power now than at any other time over the last 44 years.

“You need to go back to November 1977 for as bad a situation, when inflation was at 13 percent, or six percent above the base rate of seven percent.

“When inflation was last as high as it is now, in early 1992, the base rate was sitting at over 10 percent. That meant cash savers achieving this return were still beating inflation and seeing their purchasing power increase by around three percent a year.

“With inflation likely to remain well above interest rates for the foreseeable future, individuals might consider investing any cash savings they are unlikely to need in the short term. However, investing in stocks and shares comes with risks and can go down in value. It can be worthwhile seeking financial advice.”

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Steven Cameron, Pensions Director at Aegon comments:

“In response to soaring inflation, the Bank of England has increased interest rates for the fourth consecutive time to one percent, the highest rate since February 2009 but still very low in historic terms.

‘ While this could provide a small boost to cash savers if the rise is passed on to saving accounts, any benefit in purchasing power will be wiped out many times over by rocketing prices, with the most recent inflation figure of seven percent at a three-decade high and expected to rise further. Those in cash savings paying one percent interest are losing a huge six percent a year in purchasing power.

“Aegon analysis of inflation and interest rates over the last 50 years shows that people are losing more purchasing power now than at any other time over the last 44 years.

“You need to go back to November 1977 for as bad a situation, when inflation was at 13 percent, or six percent above the base rate of seven percent.

“When inflation was last as high as it is now, in early 1992, the base rate was sitting at over 10%. That meant cash savers achieving this return were still beating inflation and seeing their purchasing power increase by around 3% a year.

“With inflation likely to remain well above interest rates for the foreseeable future, individuals might consider investing any cash savings they are unlikely to need in the short term. However, investing in stocks and shares comes with risks and can go down in value. It can be worthwhile seeking financial advice.”

Kevin Brown, savings specialist at Scottish Friendly, said: “For those who are saving, cash is still a terrible place to be with locked in real losses, even if savings account rates are ticking up in step with the BoE.’

“Celebrating savings interest rates going up to one percent while the real value of your cash is being decayed by eight percent inflation is like being sold a car with no wheels and then getting charged for not driving it out of the forecourt – it’s just an insult to savers and hard working families.”

Victor Trokoudes, chief executive and co-founder of saving and investing app Plum, explained what it means for households alongside the rising cost of living.

He said another rate hike was “no surprise at this point”, but warned: “Savers won’t see any benefits against high inflation and need to be planning to protect and grow their savings.

“Spiralling inflation, rising living costs, a huge jump in the energy price cap and Russia’s invasion of Ukraine have all put pressure on household savings. As costs rise, budgets for the average person will be stretched ever thinner and this is likely to be the case for a long time.

“Interest rates may eventually dampen inflation, but the average person needs to make sure they are still building their savings pots and that what they do have is protected against the impact of cash devaluing.”

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With predictions of double-digit inflation looming, Britons are warned to brace themselves for a further cost of living squeeze.

Mr Brown continued: “Despite market volatility, long term savings really are still best placed in a diverse portfolio including the stock market, bonds, property and cash.

“For many households, the ability to contribute to long-term savings is being severely hampered by the cost-of-living crisis.

“But it is still an essential aspect of household budgeting and shouldn’t be cast aside. Even very small monthly contributions can make a big difference in the future.”



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