Rock-bottom borrowing costs mean it is increasingly expensive for the Government to raise cash from savers, according to National Savings & Investments, raising concerns its market-leading savings rates could be cut.
It cost the Treasury-backed bank almost £887million more to raise money from savers between April 2019 and March 2020 than if the Treasury borrowed the money, even before the Government was borrowing billions to fund its coronavirus response.
The fact it costs the Treasury so little to borrow from the markets, coupled with the fact NS&I was previously aiming to pull in less money from savers this year, may raise fears the best buy easy-access accounts could be in line for the chop.
National Savings & Investments has been propping up the easy-access market but reversed cuts to savings rates cost the government money
However, the cost of the government’s response to the virus means the axe may not fall so quickly on NS&I, if there is need for more money to be raised.
Its income bonds pay 1.15 per cent monthly interest, its easy-access account 1 per cent and its easy-access Isa 0.9 per cent, rates which are propping up the market at the moment.
Its variable rate accounts, which include Britain’s best-loved savings product Premium Bonds, were supposed to be cut at the start of May, but the cuts were reversed to support savers and help the government’s response to the coronavirus.
But the move is costly, especially at a time of falling savings rates and rock-bottom borrowing costs, and the move means NS&I has likely been inundated with piles of cash from rate-starved savers.
Goldman Sachs shut its Marcus account to new savers a fortnight ago after it pulled in £4billion between April and June, as savers looked for decent returns.
NS&I has suspended its ‘value indicator’ for 2020-21 due to what it called ‘exceptional market conditions’, but the fact it has to balance the interest of savers with the cost to the Treasury suggests cuts to its best buy rates could potentially be on the agenda.
It previously took its guaranteed growth and income bonds off sale last October and cut the rate on them, and cut rates on some of its fixed-term accounts last month.
NS&I was due to raise less money from savers in 2020-21, although this factored in already announced cuts which were then reversed. The £6bn target would be subject to revision, its chief executive said
The Treasury borrowed a record £55billion in May, and in one instance sold debt with a negative yield, meaning investors paid for the privilege of lending money to the government.
NS&I’s chief executive Ian Ackerley wrote in the bank’s annual report: ‘Between April 2019 and March 2020, for example, 10-year gilt yields fell from 1.19 per cent to 0.4 per cent.
‘As a result, the value indicator turned negative and continued to fall as accessing funding through the retail market became a less cost-effective source of government financing than gilt issuance on wholesale markets.’
But, he added: ‘NS&I gives the government flexibility by providing an alternative source of cost-effective borrowing to gilts.
Further, NS&I has proven to be a stable and largely predictable source of debt financing for the government.’
And although NS&I had previously been forecast to raise a net £6billion from savers this year, down from £11.6billion in 2019-20, he said: ‘This target will be subject to in-year revision to reflect government finance requirements arising from coronavirus.’
NS&I is used to raise money for the Treasury. But rock-bottom borrowing costs meant it was £887m more expensive to raise money from savers last year than issue government gilts
What’s stopping the rate cuts?
James Blower, founder of the Savings Guru, says: ‘NS&I need to give two months’ notice to make cuts so, in theory, they should be making them ASAP.
‘Interest rates on savings are continuing to head down and NS&I top best buy tables by a good margin, which is only going to get worse.
Any other bank, in the position NS&I is in, would have cut rates by now. I suspect politics is driving the situation…
James Blower – The Savings Guru
‘They can’t cope with the inflows, which can be seen from the feedback on financial forums, Trustpilot reviews and the feedback we have had at Savings Guru from savers.
‘Any other bank, in the position NS&I is in, would have cut rates by now. I suspect politics is driving the situation and that NS&I themselves probably want to cut but Treasury don’t want to give another bad news message with the Covid-19 situation still challenging.
‘I think the mood is changing though and suspect they’ll announce some cuts in mid-July, if the latest round of easing of restrictions planned for 4 July goes okay.
‘Politically, the Treasury will feel it can justify it a bit more then and the changes will then come in to effect mid/late September will also tie in with other government support coming to an end in October.’
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