High inflation and low interest rates: A worrying combination for savings?

Article by John Ellmore, director of NerdWallet

It’s been more than a year since the onset of COVID-19, and Britons have not experienced any financial respite.

With many people being furloughed or made redundant, household finances have inevitably taken a hit. Indeed, a recent survey conducted by NerdWallet revealed that almost two fifths (38%) of UK adults have been forced to put their long-term savings goals on hold because of the coronavirus pandemic.

COVID-19 has created a particularly hostile environment for savers. Interest rates have been held at historic lows of 0.1% for over twelve months. Adding to the financial anxieties of many Britons, however, is the fact that inflation is steadily on the rise. Just this week (21st April 2021), it was announced that inflation rose to 0.7% throughout March, up 1% from last year. Experts are also predicting a further leap throughout April, to 1.7%, as lockdown rules ease and adults are able to spend their money on the high street, as well as online.

The steady increase in inflation could be viewed positively. The fact that fuel and clothing costs are returning to pre-pandemic levels signifies that the UK is turning a corner in its post-COVID recovery. Likewise, low base rates have made borrowing cheaper, which have helped to facilitate greater consumer spending and wider economic growth. However, savers may experience more damaging effects.

How do inflation and interest rates impact savings?  

The combination of low interest rates and increased inflation have the potential to hit savers hard.

Firstly, low base rates mean that adults are less likely to receive generous returns on their savings. This is largely because the lower rates are, the more expensive it is for the bank to hold onto clients’ money. As such, savers might not be able to make their money work as hard as they may have liked.

Likewise, increases in inflation – even modest ones – can prove problematic for savers. This is because the purchasing power of people’s money starts to decline. Put simply, it makes the cost of living more expensive.

So, this increased cost of living, teamed with consistent rock-bottom interest rates could mean that people’s cash saving will lose value in real terms.

This may seem like an unnerving prospect. However, there are steps that savers can take, which can help to safeguard their money against such circumstances.

Exploring alternatives

Whilst in the current climate, traditional savings accounts might not seem overtly appealing, there are still some accounts which offer relatively generous returns. Indeed, some instant access savings accounts can still offer up to 0.6% interest, whilst certain fixed rate accounts offer as much as 1.25%.

Comparison websites are a great starting point for exploring these options. They search the market on behalf of the user, presenting their findings in a clear, jargon-free table. So, savers simply need to review their various options and select the account which best suits their needs.

Alternatively, savers might consider investments, or stocks and shares ISAs to combat low interest and rising inflation. This route presents the potential to make substantial gains, if the investments – which are selected by either the saver themselves, or the portfolio manager – are successful.  However, investments can be risky, involve complex charges and do not guarantee returns. As such, savers should assess their risk appetite, and seek financial advice where possible, before making any major decisions.

The prospect of rising inflation and low interest may seem like an unnerving prospect. After all, they have the potential to have a lasting impact on people’s financial futures. However, the key is to remain calm and thoroughly research various savings and investment options. Doing so will ensure that savers can make their money work as hard as possible, and begin their post-COVID financial recoveries.

John Elmore is Director for NerdWallet UK



As an independent financial comparison website, NerdWallet provides consumers and businesses with useful tools and insights so they can make smart money moves. 

Users have free access to our comparison tables and expert content, to help them stay on top of their finances and save time and money, giving them the freedom to do more. 

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