Cash savers’ money is declining in real terms as interest rates and inflation head in opposite directions, say experts

Typical cash Isa rates have halved since June’s Brexit vote, it emerged this week. The average cash Isa rate stood at 0.87% at the end of May 2016, but is now 0.43%, says investment firm Hargreaves Lansdown, quoting Bank of England data.

By comparison, CPI inflation has risen from 0.3% last May to 2.3% in February, and is expected to rise further this year.

Meanwhile, the amount of money sitting in cash accounts paying no interest has surged by £13bn since the vote, from £163bn last May to £176bn now. This compares with £22bn a decade ago.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says: “Since the EU referendum, interest rates and inflation have headed in opposite directions, putting even more of a squeeze on cash savers. Despite rising inflation, weak wage growth means the BoE looks in no mood to raise rates any time soon, so cash savers are left watching their money decline in real terms.”

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It’s not all bad news: this year’s Isa season has resulted in a boost to some rates, says Charlotte Nelson at Moneyfacts.co.uk. For example, the average new five-year fixed-rate Isa has risen from 1.23% at the start of the year to 1.56% today, though many people won’t want to tie up their money for that long.

Fixed-rate bonds offer some of the best rates, and it is generally understood that the longer you tie your money up the better the rate will be, adds Nelson. But research from Moneyfacts shows that at 1.23%, the average 18-month fixed bond rate is 0.13% higher than its two-year counterpart, which is typically 1.1%.

“The majority of 18-month fixed-rate bonds are provided by challenger banks,” says Nelson. “They have stepped up the competition and offer some of the best rates, and the addition of an 18-month product is another way they can distinguish themselves.”