National Savings & Investments, the government-backed savings fund, has increased interest rates on key products, boosting savings for 1.3mn account holders.
While the new rates announced on Thursday do not push NS&I to the top of the market, they mark a significant improvement from its previous position which lagged far behind its leading competitors.
The interest rates on its Direct Saver and Income Bonds rose from 0.5 per cent to 1.2 per cent. The Direct Isa rate went up from 0.35 per cent to 0.9 per cent, while the Junior Isa increased from 1.5 per cent to 2.2 per cent.
“Increasing our interest rates means that our products are priced appropriately when compared with the interest rates offered by our competitors,” said NS&I chief executive Ian Ackerley.
Laura Suter, head of personal finance at AJ Bell, said that the war for savings was growing increasingly heated.
“NS&I is latest to join the fray, significantly increasing the interest rates on a range of its products to boost their appeal — hot on the heels of its recent boost to the Premium Bond prize fund.”
The savings fund held a dominant market position before the pandemic, providing some of the best deals available to retail savers before it slashed rates.
It has steadily improved its offering this year, increasing rates for Direct Saver and Income Bonds products to 0.5 per cent in February.
In May, it announced that the Premium Bonds prize fund rate was rising from 1 per cent to 1.4 per cent, with an estimated additional 1.4mn prizes paid out in the June draw.
While the increases do not push NS&I to the very top of the table, both the Direct Saver and the Junior Isa are not far off the market leaders.
However, Sarah Coles, senior analyst at Hargreaves Lansdown, said that not all of the rises were so impressive. “The Direct Isa . . . is still a bit of a disappointment even after the rate rise. It remains well behind the market leaders, and when you can get 1.4 per cent from Cynergy Bank with no strings attached, the gap may well be too big for even the most ardent NS&I fan.”
NS&I’s move comes amid the backdrop of soaring UK inflation, which rose to a new 40-year high of 9.4 per cent in June. Sharp rises in the cost of food and petrol are driving the rate towards double digits for the first time since 1992.
Earlier in July, Bank of England governor Andrew Bailey raised the possibility of a half percentage point interest rate rise, the largest since 1995.
In December, the BoE raised rates from 0.1 per cent to 0.25 per cent, its first increase in more than three years. It last raised bank rates in June to 1.25 per cent, with a target of keeping inflation at just 2 per cent. It is forecast to reach 11 per cent by October.
Smaller lenders, which generally lead the market, have pushed up the rates they pay to savers, with the best deal for three-year bank deposits reaching 3 per cent for the first time in almost a decade. “NS&I can’t afford to fall too far behind the market,” said Coles, with its funding in the last tax year coming in at the lower end of its target.
“When the next base rate hits town as early as August 4, with a rise of as much as 0.5 percentage points, NS&I may need to up its game again.”