The 7.5 billion reasons why NS&I should raise interest rates: State-backed bank needs to attract more depositors
- The government is instructing NS&I to attract £7.5bn in savers over the next 12 months
- Next financial year it must bring in 25% more than the £6 billion for this year
- This likely means higher rates for savers if it hopes to compete with rivals
National Savings & Investments (NS&I) is expected to further increase the interest paid to savers in the coming months.
The government has tasked NS&I with raising £7.5bn from depositors over the next 12 months, despite the recent battle to prevent people from leaving for better deals elsewhere.
During the next financial year – which starts on April 6 – it will need to bring in 25 per cent more than the current £6 billion for this year. It has a £3bn margin either side of this target.
Cash call: Government has instructed NS&I to attract £7.5bn in savers over the next 12 months, despite recent scramble to keep savers from leaving for better deals elsewhere
This is expected to translate into higher rates for depositors as the government-sponsored bank hopes to compete with its rivals.
But the next step may depend on whether the Bank of England raises its base rate from the current 4 percent tomorrow.
NS&I is struggling to retain customers despite a series of rate hikes.
In the three months to September last year, it attracted £11.5bn of new money from depositors but saw £10.4bn run out, leaving a net £1.1bn.
But savers withdrew even more from their accounts in the last three months of 2022. A total of £11.3bn was paid into NS&I, but withdrawals rose to £12.4bn, wiping out the previous quarter’s gains.
This is well below the £1.75bn per quarter needed to meet the new £7.5bn target.
However, it is unclear how the latest round of rate hikes has affected savings levels, and these numbers have yet to be released.
NS&I increased its easily accessible Direct Saver and Income Bonds to 2.85 percent last month. It also brought back its one-year Guaranteed Growth Bond at a competitive rate of 4 percent in early February.
But increases in the price percentage have certainly reversed Premium Bond outflows this year.
NS&I raised the price from 3 per cent in January to 3.15 per cent in February and again to 3.3 per cent in March after £86.2 million flowed out of Premium Bonds in just one month – the first month-on-month decline for almost 12 years.
Savers plunged nearly £600 million in February. If this repeats itself in the coming months, the bank will have little to do to achieve the target.
But it may stumble, especially if the base rate rises, due to its recent poor customer service.
Historically, the state-backed bank had a good reputation for service and security and was able to attract good inflow without having to pay high fees.
But this took a serious beating during the pandemic when it tried to do away with premium bond price checks and left depositors waiting to withdraw their money after a series of interest rate cuts.
A spokesperson for The Savings Guru, an analyst, says: ‘Its recent poor customer service is rather a reason it has to pay higher rates. It may be necessary to buy in customers for some time in the hope that they will accept the rate and forgive the service.”
Savers could abandon Premium Bonds because rising interest rates mean they can get a higher guaranteed rate elsewhere. Top fixed rate bonds now pay out more than 4 percent, compared to the 3.3 percent payout on Premium Bonds.
It means that savers have to sacrifice higher interest rates to stick with Premium Bonds in hopes of winning a prize.
Research by Paragon Bank shows how savers are switching to saving with a fixed interest rate. More than £180.5 billion was deposited into these types of accounts in the last three months of last year – almost a fifth more than in the previous three months.
Laura Suter, of stockbroker AJ Bell, says NS&I struggled during the savings war, with many choosing to withdraw their money and shift it to better-paying rivals.
“The increased target means it needs to make its products more attractive to savers – representing higher interest rates and new impetus for the Premium Bond prize fund,” she says.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: ‘The higher funding target means there is some room to increase rates.
If the Bank of England raises rates further, we can expect NS&I to raise rates to avoid falling too far behind the rest of the market.”
The big advantage for savers – especially those with large balances – is that all their money with NS&I is guaranteed by the government rather than the £85,000 limit with other providers under the Financial Services Compensation Scheme.
sy.morris@dailymail.co.uk