Savers rush to NS&I: could this lead to rate cuts?

New figures suggest that savers relying on National Savings & Investments (NS&I) may need to prepare for rate cuts in the months ahead.

The rate at which savers are piling funds into NS&I has been increasing dramatically.

New figures released this week show that the bank attracted more savings in February than in the previous five months combined.

But, because of the unique way that NS&I works, this could turn out to be bad news for those who save there.

NS&I's funding target is key to rates

NS&I is unlike other savings providers, courtesy of its backing from the UK Government.

The Treasury gives NS&I a target for how much money it should bring in each financial year, and that target essentially dictates how competitive NS&I needs to be in order to attract savers’ cash.

In short, it will offer better rates when it wants to attract more funds, and lower rates when it wants to reduce inflows.

For the 2023-24 financial year, NS&I’s target is £7.5 billion, (with leeway of £3bn either side). 

NS&I hiking rates to compete

NS&I has acted frequently over the last year to make its products more attractive to savers.

For example, it has repeatedly hiked the prize rate on Premium Bonds, meaning that there are more prizes ‒ and more large prizes for that matter ‒ available in each monthly draw.

It has also increased the rates of interest paid on other savings deals, as well as relaunching its guaranteed growth and income bonds. 

This has all come down to the more competitive market seen among savings providers over the last year.

As the Bank of England has increased Base Rate, so too have providers hiked the returns on offer to savers.

As a result, NS&I has had to react too, making its various accounts more appealing.

But the early indication is they might be a little too appealing...

Rate reductions on the way?

That's why it’s possible we could see NS&I reduce the returns on offer in the months ahead.

New data released by the Bank of England showed, in April alone, savers deposited a remarkable £1.6 billion into NS&I accounts.

Essentially, savers have seen the attractive returns on offer from NS&I’s various accounts and have moved to snap them up.

And the reality is that, if so many savers are tapping into those accounts at this rate, then NS&I will hit its target well before year-end. 

That could put NS&I in a tricky spot.

If there are further hikes to interest rates on offer from its competition, then it may be able to simply maintain its current rates.

But should that not happen in the coming months, then NS&I may  have little choice but to reduce the returns on offer to savers.

As Laura Suter, head of personal finance at AJ Bell, notes: “NS&I continued to be a big beneficiary of savers’ money, as the security offered by the Government-backed provider appealed to savers spooked by the US banking mini-crisis.

"NS&I has also significantly increased its rates, providing another juicy lure for savers.

"If savers continue to flock to the provider we could well see NS&I cut rates to stem the inflows, so it doesn’t overshoot its fundraising target from the Government.”

Shopping around

It’s yet another example of how life is not simple for savers, even at a time when interest rates are rising.

Savers have had to put up with years of miniscule interest rates, with Base Rate stuck at record lows, so it’s undeniably exciting to see banks, building societies and the like increase the returns on offer.

Yet there are plenty of complications to consider.

As we have highlighted here on loveMONEY, some providers have embraced some questionable tactics in order to avoid handing over proper increases to their existing savers.

It has made it all the more essential for savers to be proactive, and keep on top of the exact returns they are getting on the money they stash away.

It’s also worth remembering that even though headline rates have risen, savers are arguably in a worse position even than when the rates were minimal over the last few years.

That’s because of the role of inflation ‒ if the rate you get on your savings is below the rate of inflation, it is effectively losing value, even if it is growing in cash terms.

Given the rate of inflation is still enormous at 8.7%, there is only one inflation-beating account on the entire market: a 9% regular saver account that only allows you to deposit a maximum of £600 over a year.

Until inflation falls much further, then the vast majority of savers will still be seeing the value of their pot drop.