Scary news for savers

Uh oh! Savers are in trouble....

The decision last week by the Bank of England to start printing money might seem very far removed from your own financial decisions.

But it’s not. It has huge implications for every borrower and saver in this country.

And not just because, as my esteemed colleague Ed Bowsher wrote in his blog, it indicates that the Bank of England boffins are clearly very worried about the outlook of the UK economy. But because, as a sort of side effect, it also indicates that interest rates are unlikely to rise anytime soon.

Why? Printing money (also known as quantitative easing) is like injecting adrenaline into the economic system - it aims to get banks lending again. This in turn makes it easier and cheaper for businesses to borrow, which in turn should help firms to expand and grow. If this happens, this will then be good news for workers and consumers like you and me, who in an ideal world would then go out and spend more, further boosting growth.

That’s the theory anyway. Whether life will actually unfold as the Bank of England intends it to, only time will tell.

But right now, the decision to print money means it’s much less likely interest rates will rise anytime in the near future.

Why? Because putting up interest rates slows down growth, making it more expensive to borrow - effectively, it’s like applying brakes to the economy.

So it’s very unlikely that the Bank of England would have started printing money if it was planning to increase interest rates any time soon. To carry on the analogy, that would be like pressing the brakes and the accelerator at the same time!

How long have we got before interest rates rise?

It’s difficult to say. Interest rates will still inevitably have to rise at some point in the future. The decision to print money simply means they are less likely to rise in the near future, say, the next three to six months.

But remember that the outlook for the economy - and the markets - can change quickly. If, in six months’ time, things are looking up for the economy, then things may soon be looking up for interest rates as well. Watch this space!

What does this mean for savers?

It’s bad news. Interest rates on savings accounts are likely to continue to stagnate and, indeed, may get even more uncompetitive. Inflation is also likely to rise, following the increase in money supply.

But don’t be too disheartened. There are ways you can protect yourself now that you are armed with this information. For example, you may want to avoid variable rate savings accounts and opt for fixed rate bonds instead. This will guarantee your rate won’t drop, and you can usually get a better rate in return for forgoing access to your savings.

You can earn as much as 4.65% with Saga if you’re prepared to lock your money away for five years.

But I don't think it's a good idea to fix for more than a year, as there is still a strong possibility that interest rates will begin to rise in 2012. And if you're only prepared to lock your money away for a year, there's not much point locking it away at all! This is because there isn’t much difference in the rates offered by the market-leading one-year fixed rate bond providers (around 3.4%) and the best instant access savings providers (around 3%).

Personally, I like the ING Direct Savings Account, which is one of the instant access savings accounts paying 3%. Although the overall rate is variable, it includes a fixed rate 12-month bonus of 2.46%. So you get a competitive rate of 3% now, can rest assured your rate will not drop below 2.46% over the next year, and still enjoy immediate access to your cash. 

Alternatively, you could go for an inflation-linked bond which will guarantee you a return above inflation. Even though you have to lock in, your rate will always offer you a decent return. The Post Office Inflation Linked Bond is a good bet - it offers a return of 0.25% above inflation per year if you lock in for three years, or 1% above inflation per year if you lock in for five years. Read New savings accounts that beat inflation to find out more.

Top one-year savings accounts

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