NS&I bond raises hopes of greater savings competition

A market-leading savings bond announced in the autumn statement will hopefully encourage other providers to unveil better-paying deals, and could mean the government thinks interest rates may rise next year, according to one industry expert.

During his speech on Wednesday chancellor Philip Hammond pulled a small rabbit out of his hat in the form of a government-backed three-year NS&I savings bond expected to pay around 2.2% interest, which will go on sale in the spring. The Treasury said this was the “indicative” rate, and added: “This may be adjusted to reflect market conditions when the product is launched.”

The best current equivalent bond pays 1.63%, and Susan Hannums from Savingschampion.co.uk said the fact the government opted for a rate that is market-leading but not completely out of reach for other providers could encourage competition. “We may see a flurry of activity around that time.”

She added: “Does [the rate] mean they are expecting interest rates to rise next year? That might be why they are pricing it around that level.”

Nevertheless, the offer is not going to cause a mass outbreak of excitement, and many market commentators said high-interest current accounts still offer some of the best returns. Nationwide and Tesco Bank have, respectively, accounts paying 5% for 12 months and 3% with no time limit.

However, there was also bad news for savers last week, with figures showing cash Isa rates are on the slide. First Direct revealed it is cutting the rate on its cash Isa from 0.9% to 0.5% from 10 February 2017. It had only just cut the rate from 1.3%.

Cash Isa rates have taken a hammering of late, with information provider Moneyfacts saying the average long-term fixed Isa rate has dipped below 1% for the first time. This month the figure stood at 0.98% – down from 1.98% a year ago. The highest five-year fixed cash Isa rate currently on offer is 1.5% from Metro Bank.

Meanwhile, the average no-notice cash Isa rate is now just 0.73%. If you want a decent-paying easy-access Isa Coventry building society offers 1.1%. Those with cash in what may be the lowest-paying instant-access Isa – NatWest’s 0.01% on £1-£24,999 – should probably move it pronto.

On Wednesday, Hammond also confirmed the increase in the annual Isa allowance from £15,240 to £20,000 from April 2017.