- Savers deposited £7.7bn into NS&I accounts in September
- The main reason for this was NS&I’s one-year fixed rate bonds with a maturity of 6.2%
- NS&I’s introduction of the bonds “has hurt the rest of the savings market”, says one expert
Savers rushed to deposit £7.7 billion into national savings and investment accounts in September, according to the Bank of England’s Money and Credit report.
This is the biggest cash inflow for the Treasury-backed bank in a month since August 2020, when depositors poured in £9.8 billion.
In early September, NS&I launched two best-buy one-year fixed-rate bonds – Guaranteed Growth Bonds and Guaranteed Income Bonds – which paid an interest rate of 6.2 per cent.
Experts say the interest rate on these accounts was “undoubtedly” the main reason for the sharp increase in cash flows into NS&I.
Savings rush: Savers rushed to pour £7.7bn into NS&I accounts before the Treasury-backed bank raised interest on its one-year fixed-rate bonds at 6.2%
The Guaranteed Growth Bonds dominated the best buy tables throughout the five weeks they were on sale, with no other savings provider able to beat NS&I’s excellent interest rate.
The bonds were withdrawn on October 6 due to increasing demand and NS&I reported that 225,000 customers had signed up for the products.
James Blower, founder of the website Savings Guru, says: “If we know from their reports that there have been outflows on some other products, it is quite possible that they have taken in more than £7.7bn and this is the outflow other products.”
He added: “Taking into account the average fixed interest balance of a challenger bank of around £40,000, one would assume that NS&I received around £9 billion under the one-year deal.”
“The alternative is that they recorded a lower average balance, say £30,000, and the rest came from small inflows into premium bonds and other products.”
“My best guess is that they made just over £8bn on the one-year deal, made less than £100m on premium bonds and experienced outflows on other products.”
NS&I’s decision to issue the one-year bonds at this rate was met with resentment from the rest of the savings market – namely because it rarely makes it to the top of the best buy rankings.
Industry body UK Finance criticized NS&I for distorting the bond market after it withdrew the products.
NS&I’s aim is to raise cost-effective funding for the government – which the one-year rate of 6.2 per cent failed to do, as it was “well above the odds”, according to Blower.
Andrew Hagger, founder of personal finance website MoneyComms, says: “Around 225,000 one-year bonds were taken out before the 6.2 per cent interest rate was removed, so this will be the main reason for this increase in new money.”
“NS&I doesn’t normally work this way but it needed to raise funds to meet its government targets and so took this aggressive stance which would have damaged the rest of the savings market as providers couldn’t compete.”
In contrast, households withdrew £700 million from banks and building societies in September, according to the Bank of England report.
Hagger expects NS&I inflows to ease after the end of the 6.2 per cent deal, while Blower says: “NS&I is trending towards negligible inflows and we expect this trend to return after this product is gone is.”