Domesday Live

Are savers better off with higher interest rates?

Higher rates help savers because banks pay more on savings, but what matters is whether the rate beats inflation. When inflation is above the rate on savings, the money in the account buys less each year, even though the balance grows. Real returns on savings have been positive again only recently.

Why it happens

• Nominal and real. A 4% savings rate with 3% inflation grows your money's buying power by about 1% a year. With 5% inflation, it shrinks by 1%.
• Banks pass on rises slowly. Banks tend to raise mortgage rates quickly and savings rates slowly, and the best rates are for fixed deals or accounts you have to switch to.
• Tax matters. Interest above the personal savings allowance is taxed, so ISAs can help, and higher-rate taxpayers keep less of what they earn.