NS&I exceeds savings target: rate cuts now 'highly likely'

NS&I has already taken the axe to its Green Bond rate and it could soon target other savings products – including Premium Bonds.

Savers have been told to prepare for rate cuts if they hold money with National Savings & Investments (NS&I).

Fine print buried in yesterday's Autumn Statement has made reductions "highly likely" according to one analyst, with Premium Bonds possibly in the firing line.

There had been speculation in the build-up to the chancellor's speech that he was actually planning a dramatic increase to NS&I's annual fundraising target – the amount of money it needs to attract from savers each year – which would have meant its products would become more attractive.

Sadly, that proved wide of the mark and the target remained unchanged.  

Given that NS&I has already exceeded its 2023/24 funding target a full six months early, that means it no longer has to compete for savers' cash. 

As Laura Suter, head of personal finance at AJ Bell, explains: “Savers should brace themselves for rate cuts on NS&I accounts and for the Premium Bond prize fund to fall.

“We’ve already seen NS&I pull its Guaranteed Bonds and cut the rate on its Green Savings Bond, but it’s highly likely that other accounts will be up for the chop too."

The Green Bond example would be particularly worrying for savers because the rate cut was so severe, falling from 5.7% to just 3.95%. That's a reduction of 1.75%.

However, it's important to note that any cuts to a hugely popular product like Premium Bonds would likely be far more muted as NS&I would want to avoid triggering a mass exodus of funds (more on that later).

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How NS&I smashed its 2023/24 funding target

The soaring demand for NS&I products hasn’t happened by accident ‒ the Government-backed institution has been pretty aggressive with the setting of its interest rates in order to be more attractive to those able to put some money aside.

For example, it has repeatedly hiked the prize rate on Premium Bonds.

In September, the prize rate increased from 4% to 4.65%, its highest level since 1999.

In practical terms, that means there are more prizes on offer – and bigger prizes to boot – than was previously the case.

It’s not just Premium Bonds though, with NS&I also launching eye-catching one-year bonds paying a whopping 6.2%.

They were so effective that they were pulled after just 37 days, courtesy of those inflows from savers. 

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NS&I needs to stem in-flows

It’s worth reflecting on the slightly strange position that NS&I is in when it comes to developing its product range.

Since it is a Government-backed provider, it is given an annual target each year for how much money NS&I should attempt to bring in from savers, and this target then influences how NS&I goes about setting its interest rates.

It’s why, when NS&I has a high target or at least is some way off hitting its target, you start to see the provider launch more eye-catching rates or improve the prize rate on Premium Bonds.

Its target for last year was £6 billion, though there is a bit of leeway there, with NS&I able to go above or below that level by £3 billion. In the end, it overshot its target, bringing in £10 billion.

As a result, its target for this financial year was set at £7.5 billion, a level that it exceeded in October.

"The latest figures from the provider show it attracted £9.8 billion of savers’ money at the half-year point, with £7.7 billion of that coming in the second quarter alone, predominantly from the one-year bonds," said Suter at AJ Bell.

"It gives the provider generous wiggle-room of £3 billion either side of that target, meaning it can only raise another £700 million in the next six months before it breaches its extended target."

Rate cuts unlikely to be dramatic

The reality is that NS&I will continue to bring in some money from savers, simply because of the draw of Premium Bonds.

There will always be some savers who fancy trying their luck, happy to sacrifice a dependable interest rate for the potential of landing a big prize.

Equally, Premium Bonds are a popular way for people to gift money to younger relatives.

Given this, there is little impetus for NS&I to continue offering great rates on its savings products.

There’s obviously a balancing act to be found here ‒ it doesn’t want to see massive outgoings from savers, should it cut rates to completely miserly levels, but equally it doesn’t need to go out of its way to attract anyone new.

As Suter explains: "The Government-backed provider raises rates to draw more savers in – if it doesn’t need to attract any more money it will cut those rates.

"It has to play a delicate balancing act to avoid mass withdrawals that counteract the inflows it’s already seen this year – so a slow and steady approach to cuts is more likely than a giant axe to rates."

Manage all your savings accounts in one place with Raisin, the simple savings service