Savings income down by 66% from when inflation was last at 5%

Wednesday, 19 October 2011 10:48

Savers in 2011 hold three times more funds than people in 1991, but earn just a third of the income, thanks to five per cent inflation and low rates of interest, HSBC has revealed.

In a new report, comparing the financial conditions for Britons at the moment with the last time inflation hit five per cent, the bank showed how savers are suffering, but mortgage holders are reaping the benefits.

The study comes after the Office for National Statistics revealed the Consumer Price Index inflation broke the five per cent barrier last month, a scenario that last occurred in 1984, 1988 and 1991.

In those three years, a key difference in the financial conditions was that the Bank of England base rate stood at around double the rate of inflation, meaning saving pots did not deteriorate in value.

Today, they receive just a fifth of the rate of inflation, the analysis stated.

However, while savers earned a decent return, mortgage rates were also high, averaging more than 11 per cent compared to the equivalent figure of 3.2 per cent today.

This low repayment rate means that borrowers hold four times the debt of those in 1991, yet pay only marginally more in interest.

Bruno Genovese, HSBC's head of savings, remarked: "The government and Bank of England have been clear their priority is low interest rates. Without them, the government will pay more to fund its deficit and more consumers may struggle to meet their debt repayments. The hope is that eventually, low rates will tease growth out the economy by stimulating businesses and consumers to invest and spend."

"With this in mind, savers must make the best of their situation, use their tax efficient savings allowances, hunt for the highest rates available and perhaps offset any remaining savings against their mortgage if they have one. We expect inflation to fall next year, but interest rate rises are still some way off."

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