Today the Bank of England’s Monetary Policy Committee have met and have unanimously voted to increase interest rates from 0.5% to 0.75%. The minutes of their meeting also show that, “all members agreed that any future increases in [the] bank rate were likely to be at a gradual pace and to a limited extent.”
Obviously, Brexit uncertainty has been one of the reasons for previous reticence to raise rates, while interest rate rises in other areas have been a key driver for the increase – a balancing act that the MPC must perform on an ongoing basis.
As result of today’s increase and those to come, we can expect to see increases in the rates paid on savings accounts. However, products offered by National Savings & Investment (NS&I) do not act like normal retail savings accounts.
Back in March the returns on NS&I’s Guaranteed Income and Guaranteed Growth Bonds were cut and it has now been announced that the return on the Direct ISA will reduce from 1.00% to 0.75% from 24th September.
These apparently anomalous changes are products of NS&I’s operating framework.
NS&I investments are backed by the UK Treasury, so they must therefore adhere to limits set by the Government. being backed by the Government they are, arguably, more secure than most other deposit accounts, although the availability of up to £85,000 in compensation through the Financial Services Compensation Scheme for savings accounts does limit this advantage.
As stated by Jill Walters, NS&I Retail Director, they have to ‘strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector’. All of which means that NS&I cannot attract too much investment in fairness to the taxpayer (who funds the return) and the savings market (which could otherwise face ‘unfair’ competition).
NS&I savings products are generally high quality and ‘super’ secure – just don’t expect them to behave like the rest of the market when interest rates rise.