High street lenders have warned that the re-launch of the government’s popular saving scheme will dry up the new money supply in the financial system, thus hampering credit growth in the mortgage industry.
The government backed National Savings & Investments (NS&I) on Thursday re-launched its tax-free, inflation beating savings certificate, carrying an interest rate of RPI+0.5% over a five-year period. The Retail Price Index (RPI) is reset every year and is presently calculated at 5.3%.
To avoid the anticipated rush, NS&I has decided not to sell the certificates through post-offices. Saver can buy them online or over the phone, instead.
NS&I certificates have been hugely popular since they provide excellent safety (guaranteed by the government) and give above-inflation returns. There are few products in the market which can match NS&I returns. High income individuals need to earn a return of 9% + in a standard savings account to equal it.
Although the Bank of England has held interest rates at historically low levels, lenders have been hiking rates on deposits to attract new savers for increased capital reserve requirements.
“Government borrowing is coming down as a result of the austerity measures so it seems a strange time to allow National Savings a positive target for new money”, said director general of Building Societies Association, Mr. Adrian Coles.
“This is £2bn that the private sector won’t be able to raise and lend to first time buyers and potential homeowners”, he rued.
However, investors, financial advisers and consumer groups have welcomed the government’s move.
“The combination of ultra-low interest rates and rising inflation has been a double blow for savers and pensioners”, said SAGA director-general Ros Altman. “I would expect huge demand from savers desperate for respite from price pressures”, he added.