ISAsJun 22 2017

Inflation erodes £377 from client accounts every second

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Inflation erodes £377 from client accounts every second

Inflation is eroding savers' cash accounts to the tune of £377 a second, research from property bond provider Minerva Lender has found.

According to analysis from Minerva Lending, which has just launched an asset-backed, five-year property bond targeting a 7 per cent income a year, cash savers are being battered by the 'pincer movement' of protracted low interest rates and rising inflation, which hit 2.9 per cent in May and is set to rise further.

The data shows that UK savers have amassed total deposits of £700bn, according to the Financial Conduct Authority’s Cash Savings Market Study Update 2016.

However, thanks to inflation these accounts are losing £32.6m a day, even with the best average instant access accounts’ interest rate of 1.2 per cent - available from just a few lenders, such as Al Rayan Bank and Atom Bank, factored in.

Although earlier this week the Bank of England governor, Mark Carney, said the base rate would remain static despite pressure building to deal with rising inflation, which hit 2.9 per cent (CPI) last month, three hawks on the monetary policy committee voted to raise rates, out of a total of eight members.

When applied to a typical nest egg over five years the effects of inflation are devastating, said Ross Andrews, director of Minerva Lending.

He explained that a saver with £5,000 held in the average instant access account will see its value slump £411 in real terms to £4,589 in that time. Someone with £25,000 would see that sum shrink £2,055 in real terms to £22,945 in the same period.

Table: Savings in real terms after 1.2% interest and impact of 2.9% CPI.

Savings:Year 1Year 2Year 3Year 4Year 5
£25,000£24,575£24,157£23,746£23,342£22,945
£5,000£4,915£4,831£4,749£4,668£4,589

Mr Andrews said: "Even if interest rates are raised in a bid to combat inflation, Carney’s Mansion House speech hinted any base rate rises will be gradual, resulting in long-term pain for savers.

"With prospects this dire, savers are expected to consider alternative ways to maximise their returns."

He said the new fixed-rate bond offering 7 per cent gross a year, aims to beat the current base interest rate and rate of inflation.

It pays out semi-annually on loans that are restricted to a maximum loan to value of 70 per cent, which he said would provide a minimum 30 per cent buffer before any capital is put at risk.

Philip Milton, proprietor of Devon-based advisory firm PJMilton, has warned against ongoing weakness in sterling, Brexit uncertainty and higher-than-wage-growth inflation.

He said: "Sterling had an inevitable wobble and is again far too low now but uncertainty creates weakness and until a few definite pointers for Brexit and the future manifest themselves, things won’t change very much.

"However, I stick by my previous prediction: sterling remains too lowly priced against major international currencies and in the end will settle at much higher levels than now. I believe it is time to repatriate excess Dollar and Euro assets."

Mr Milton added that the 2.9 per cent inflation rate is now above the predictions made last year by the Bank of England as to the level that inflation would hit. 

He added: "This is now above average increases in income though it is bemusing that when it was the other way around with incomes rising higher than inflation, the factor never saw the same degree of headlines."

simoney.kyriakou@ft.com