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What does the CPI rise mean for Brits?

Adrian Lowery

Adrian Lowery

The headline rate of consumer prices index inflation has risen to 5.4 per cent in December from 5.1 per cent in November – that’s above consensus expectations of 5.2 per cent and the highest rate in 30 years. 

With the Bank of England seeming more hawkish on inflation, another rate rise on February 3 at the next Monetary Policy Committee is on the cards – even though a rise then to 0.5 per cent would be the first back-to-back rate increases since 2004.

Even before today’s inflation data, money markets were fully pricing in one rate hike by next month and one full percentage point increase in interest rates by the end of 2022 - in other words a bank rate of 1.25 per cent by year-end.

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That’s not to say of course the MPC will move again in February, as they will be monitoring real economy.

The last GDP growth reading for November was strong at 0.9 per cent, but there will be uncertainty over the full economic impact of Omicron in December and January, and this could give the rate-setters pause for thought.

But with the energy price cap set to rise and add to inflationary pressures, it will be at the least a close split decision.

What does this mean for savers?

Savers with cash sitting in deposit accounts should take little comfort from the fact that the Bank of England will probably hike its benchmark rate a couple more times this year.

What’s happened since the MPC slightly unexpected hike from 0.1 per cent to 0.25 per cent on 16 December?  

Not much on the part of the big banks. 

Barclays last week became the first High Street name to react to the 0.15 percentage point rise in base rate by raising the interest on its Instant Cash Isa from 0.02-0.05 per cent to 0.05-0.10 per cent.

Its rivals are paying rates around 0.01 per cent on easy-access accounts, and two of the big banks don’t even allow non-current account holders to open easy-access savings. 

The big banks are disinterested in attracting savers’ deposits because they are already awash with cash.

They have received an influx of savings from better-off households during the pandemic as spending plunged, amounting to an estimated £187bn in deposits. And even before that they were benefitting from the Bank of England’s quantitative easing.

It’s unlikely this will change significantly any time soon – even if the MPC hikes rates further this year.

'Virtually nothing'

Although a bank rate of 1.25 per cent would notionally be the highest for 13 years, it means virtually nothing to savers: the UK’s leading retail banks don’t need savers’ deposits and so will probably decline to pass on base rate hikes in any meaningful way.

And even if they did, interest is more than eclipsed by inflation, leaving real returns on cash savings deeply in the red. When will real interest rates on savings reach zero, and inflation cease to eat into the value of cash deposits?