Is the savings tide turning? NS&I boosts interest rate on three accounts

NS&I has increased the savings rate on three of its accounts. So how do the new rates stack up? And will other providers follow suit?

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NS&I, the government’s own savings provider, has upped the interest rate on three of its savings accounts. The move comes less than a week after the Bank of England increased its base rate.

So, is this a sign that savings rates are (finally) starting to head upwards? And how does NS&I’s new offering compare with other savings accounts?

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What changes has NS&I announced?

NS&I has announced it is increasing the interest rate on its Direct Saver, Income Bonds, and Direct ISA accounts. All three of these accounts are set to pay 0.35% AER variable interest.

NS&I’s Direct Saver and Income Bonds previously offered savers 0.15% AER variable, while its Direct ISA paid just 0.1% AER variable.

This means that NS&I has more than doubled the interest rate offered on three of its savings accounts. 

When will the interest rate changes take effect?

The boosted savings rates apply from Wednesday 29 December. This means that if you don’t already have a savings account with NS&I, but wish to open one, there’s a chance you’ll start earning the higher rate straight away given the typical time it takes to open a savings account.

Why has NS&I increased its savings rates?

There are two likely reasons why NS&I has taken the decision to up its savings rates.

1. The higher Bank of England base rate

The Bank of England recently upped its base rate for the first time in over three years. This action has made borrowing more expensive for lenders, which makes savers’ cash more attractive. As a result, it’s possible savings rates will increase in the near future to reflect this.

NS&I upping its savings rates less than a week after the BoE’s decision may suggest it’s keen to get a head start on other banks.

2. NS&I’s ‘Net Financing’ target

The government runs NS&I to gain access to savers cash so it can fund public projects. To ensure NS&I raises enough cash each year, it sets it a Net Financing target.

For the financial year 2021/22, the government set this target at £6 billion. However, according to NS&I’s latest figures, the bank had raised just £0.6 billion up to October 2021.

By upping its interest rates, NS&I will hope more savers will be encouraged to open an account.

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How do the new rates compare with the rest of the savings market?

While higher savings rates is a refreshing turn of events, NS&I’s new offering still falls short of interest rates offered on other savings accounts right now. This is highlighted by Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. 

She explains: “NS&I is raising its sights to bag more savers and avoid undershooting its fundraising target for the second consecutive year. However, these new rates are still only around half as rewarding as the most competitive on the market, so for most savers, there’s a risk they’ll miss the mark.

“At 0.35%, these rates are still far from market-leading. You can currently get up to 0.71% on easy access savings and 0.67% on an easy access cash ISA, so you’re sacrificing almost half of the potential interest in order to gain the benefits of the NS&I brand.”

A key NS&I benefit Coles is referring to is the fact that anything you save with NS&I is backed by HM Treasury. This is not the case with normal savings accounts, where savers must instead rely on the FSCS savings safety protection, which is limited to £85,000.

For more on this point, see our article that explores whether NS&I accounts are safer than normal savings accounts.

Will other providers start upping their savings rates?

While NS&I has decided to up its savings rates, widespread rises across the savings market haven’t yet taken place. 

For example, Investec’s market-leading easy access savings account hasn’t moved from 0.71% over the past week, despite the fact that the base rate rose last Thursday.

Interestingly, the market-leading one-year fixed account has actually decreased over the past week. A week ago, the highest one-year fix stood at 1.39% AER. As this rate is no longer available, the highest one-year fix now stands at just 1.37% AER, via Zopa.

Despite this, it could be that at 0.25%, the base rate is still low enough for banks not to care too much about attracting savers’ cash. However, should further base rate rises occur in 2022, then it’s plausible that savings rates will, finally, start heading upwards.

Are you looking for a place to stash your cash? While savings rates are still disappointing, it’s always a good idea to get the highest rate possible. See our top-rated savings accounts for your options.

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