Deposit rates are continuing to fall.
On 24 November, the interest rate cuts that National Savings & Investments (NS&I) announced back in September took effect. The headline change was a drop in Income Bond rates from 1.15% to just 0.01%.
Reports suggest that NS&I has seen predictably heavy outflows, although savers have struggled to find alternatives. Such has been the flow of money, top-of-the-table offers have frequently lasted only a few days before their providers – often smaller banks –received all the funds they required. There is a certain irony here, as back in the summer the same institutions were quietly complaining about NS&I cornering the market.
According to Moneyfacts, the interest rate monitoring website, in November the average rate on easy access interest accounts was just 0.22%. Locking your money up for a fixed term produced a higher, but hardly enticing return – the average one-year fixed rate bond was just 0.61%, a record low. Even the best five-year return, from the Sharia banking sector, was an expected profit rate of 1.5%.
Half a decade is a long time to tie up cash at such an historically low rate, but the chances of interest rates rising any time soon appear to be close to nil. The Bank of England has recently been sounding out institutions about their ability to cope with negative interest rates. To judge by experience in other countries where negative rates already exist, only large savers and corporate depositors would actually pay to park their money at a bank, while everyone else received a zero return.
In practice, the UK government is already borrowing at negative interest rates. For example, in late November, most conventional government bonds (gilts) with a maturity date of up to March 2025 guaranteed their purchasers a loss (i.e. a negative yield), if held to the end of their term.
If you are looking for an income return above today’s miniscule deposit rates, then you have to accept some risk to your capital. While dividends from shares have fallen globally in the wake of the pandemic, there are now signs that the worst may be over and that dividends could start increasing in 2021.