Will NS&I hike rates as competition heats up?

The government-backed bank saw significant outflows in June, which could encourage it to hike rates as it competes for business.

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(Image credit: © Getty Images)

Interest rates on the best savings accounts have been rising as providers pass the Bank of England’s (BoE) base rate hikes on to consumers, but it seems National Savings & Investments (NS&I) is failing to keep up. 

The latest figures from the Bank of England show this has put savers off the Treasury-backed savings provider. “With interest rates rising across most other savings providers, NS&I is struggling to keep up and attract enough assets,” says Laura Suter, head of personal finance at AJ Bell. 

“Any money [NS&I products]  did draw in was wiped out by flows going out, meaning no net inflows,” adds Suter. “This is a drop from the £800 million of inflows they saw in May and is the third month of falling inflows.”

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The good news is this could push NS&I to hike rates further. 

NS&I hikes rates to keep up with the competition

Over the past year, NS&I has bumped up the Premium Bond prize rate and its fixed-term savings rates. 

In early July, it hiked its Premium Bond prize rate to 4% from 3.7%, the highest level in 15 years. It also boosted rates across a number of its fixed products

After recent hikes, its Guaranteed Growth Bonds and Guaranteed Income Bonds offer a rate of 5%, and the rates on Direct Saver and Income Bonds stand at 3.40%. 

But despite the increases, the rates still lag those on offer from other lenders. 

Indeed, while the country’s biggest banks have been slow to pass higher interest rates onto savers, forcing the FCA to take “robust action,” challenger banks are now offering rates of over 6% on fixed savings and of over 4% on easy access accounts

“We’ve already seen lots of interest rate rises from NS&I but more will surely be coming as the government-backed savings provider saw another drop in flows in June,” says Suter. 

“Taking a punt on Premium Bonds was a more attractive gamble when interest rates were rock bottom, but savers now are giving up 4.5% or more on an easy-access account for the chance they might win big on Ernie, which is a tougher call to make.”

Why could NS&I boost its rates?

Not only does NS&I need to keep up with competitors, but it also has a new funding target it has to hit. Both of these factors could push it to hike rates again. 

NS&I is a funding source for the Treasury and, as such, is 100% guaranteed by the government.

And with the country’s budget deficit running at one of the highest levels in recent history, the government has asked NS&I to try and raise more money for the state.

In his Spring Budget Jeremy Hunt set the bank a funding target of £7.5bn with an option to raise an additional £3bn, up from £6bn the previous tax year.

This means NS&I has to attract more business. There are a few things it could try in order to do so.

The target’s increase to £7.5bn “isn’t a huge leap, which means we’re unlikely to see the need for brand new products in order to stimulate demand,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

“Instead, it could hike the maximum holding in various accounts – including Premium Bonds,” adds Coles. “However, it would mean attracting more cash from the super-wealthy, which doesn’t help it towards its goal of enabling more people to build a savings habit, which makes this more improbable.”

“What’s far more likely is it deciding to boost rates overall to keep savers keen. This is likely to mean it keeps pace with any further rises in the market overall, and may also need to become slightly more competitive.”

“As ever with NS&I, it’s highly unlikely to be market-leading,” says Coles. “However, given the fact it is 100% guaranteed by the Treasury, there will be some savers who don’t need NS&I to be the best rate on the market to be very attractive indeed.”

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.