NS&I’s 6.2% bond, the market leader, puts pressure on banks

National Savings & Investments raised its interest rate on one-year fixed bond from 5% to 6.25%, putting the company in a leading position on a major segment of the saving market. This has increased pressure on the banks to follow.

The government is determined to force banks to pass on recent increases in interest rates, and this latest move highlights that determination.

Andrew Griffith, UK’s Economic Secretary to the Treasury said that it was vital that savers benefit from the recent interest rate increases. He added that NS&I’s rates for one year (on its Guaranteed Growth and Guaranteed Income Bonds), were at their highest levels since 2008.

NS&I has raised rates faster than commercial competitors at a moment when MPs, Ministers and Regulators have demanded that banks raise savings rates to competitive levels. The UK’s Financial Conduct Authority held a meeting with providers in July after raising concerns about the fact that savings rates lagged behind increases to mortgage costs.

NS&I has changed its policy, which was to avoid aggressive competition in order to prevent distortions on the UK savings markets. It is backed by the state, unlike mainstream lenders. This means that it can guarantee all deposits instead of just £85,000 as offered elsewhere.

Moneyfacts, a data provider, says that the previous top-rated one-year fixed rate product offered 6 percent to savers.

NS&I also announced that it would increase the interest rate on bonds for customers who have products maturing in the range of two to five years. The new rate will be between 5.37 percent and 5.8 percent. It increased the rate on its Green Savings Bond to 5.7 percent last week.

Moneyfarm’s co-founder Giovanni Dapra said, “This environment is becoming more competitive, partly due to the fierce lobbying of the government.” “Higher interest rates are both fair and necessary to continue attracting and keeping retail cash deposits.”

was given the task of raising £7.5bn as net financing for government in this year. This is up from £6.1bn the previous year. The provider had previously exceeded its targets by raising around £10bn between 2022 and 23.

NS&I is facing a tougher environment to raise money this year, with the central bank’s rate hovering at around 5.25 percent and inflation above target putting pressure on household finances. According to Bank of England statistics, households withdrew a total of £200mn (£170m) from NS&I during July. This follows a net inflow of £2.1bn (£170m) in the first three months of the year.

Analysts also noted that despite NS&I’s rate increases, those with greater savings would still be better off investing in gold.

Rachel Winter, partner at Killik and Co, said that while the headline interest rate is attractive, the net rate will be much lower for taxpayers who pay higher and additional rates. In the current high rate environment, it is easy to exceed the £1,000 personal saving income allowance.

Winter said that investors would get a better net return if they invested in short-dated gilts, with a low discount and a high coupon. This is because capital gains tax does not apply to any increase at maturity.

Those without professional advice or experience will find it difficult to access the gold market .