Inflation falling a double edge sword for savers

The announcement by the Bank of England that inflation has fallen during May, with the Consumer Price Index (CPI) down to 3.40 per cent, gives Britain's beleaguered savers some short term relief, but the forecast for the longer term looks bleak, according to moneysupermarket.com.

The CPI drop to 3.40 per cent from 3.70 per cent in May is some relief for savers, but falling inflation also spells longer term bad news with the likelihood of Bank of England base rate increasing now reducing.

Basic rate tax payers will now need an account paying at least 4.26 per cent to gain benefit in real terms from their savings, increasing to 5.68 per cent for higher rate tax payers, and 6.81 per cent for 50 per cent taxpayers.

Not one Easy Access savings account for balances of £1,000 pays enough interest to negate the combined effects of inflation and tax. The best paying easy access account is the Alliance & Leicester Online Saver Issue 7 paying 2.81 per cent. Regular savers fair slightly better with four of the top 10 regular savings accounts paying interest higher than 4.26 for basic rate tax payers but higher rate tax payers have little choice with only one account paying higher than 5.68 per cent. Anyone looking for a mini-cash easy access ISA should be aware that only one ISA currently pays a return above 4.26 per cent, which is the rate needed for a return.

Kevin Mountford, head of banking at moneysupermarket.com, said: "It would be fair to say that 2010 has so far not been the year for savers. With low interest rates and rising prices, it is difficult for savers to keep a track of their finances to make sure they are getting the best return on their money. Unfortunately, with falling inflation also comes the reality that the Bank of England is unlikely to increase interest rates in the foreseeable future, so at the moment, things don't look to be improving.

"With rates so low it is critical that savers are vigilant and switch accounts as soon as their rate starts to drop. Any saver who opened their account more than one year ago is likely to be able to get a better rate by switching to a new account (with the exception of fixed rate bonds). For example anyone taking out a top of the table one year bond last year would have received a rate of 5.50 per cent but this has now dropped to 0.10 per cent."