The 7.5 billion reasons why NS&I will have to raise rates

National Savings & Investments (NS&I) is expected to further increase the rates paid to savers in the coming months.

The government has tasked NS&I with attracting £7.5billion from savers over the next 12 months, despite its recent struggles to stop people moving elsewhere for better deals.

In the next financial year – which starts April 6 – it will need to raise 25% more than its current £6billion for this year. He has a £3billion margin on either side of that target.

Cash appeal: The government has instructed NS&I to attract £7.5billion from savers over the next 12 months, despite its recent struggles to stop savers leaving to seek better deals elsewhere

This should translate into higher rates for savers if the government-sponsored bank hopes to compete with its rivals.

But his next move could hinge on whether the Bank of England raises its base rate tomorrow from its current 4%.

NS&I is struggling to retain customers despite a series of rate hikes.

In the three months to September last year it attracted £11.5billion in new money from savers but saw £10.4billion come out leaving it a net extra of £1.1 billion.

But savers withdrew even more from their accounts in the last three months of 2022. A total of £11.3bn was paid to NS&I, but withdrawals rose to £12.4bn, canceling out earnings from the previous quarter.

That’s well below the £1.75bn per quarter he needs to hit the new £7.5bn target.

However, it’s unclear how the latest round of rate hikes has affected savings levels, as those numbers have yet to be released.

NS&I increased its direct savings and easy-access income bonds to 2.85% last month. It also brought back its one-year guaranteed growth bond in early February with a competitive rate of 4%.

But price rate hikes have certainly reversed the outflow from premium bonds this year.

NS&I raised the price from 3% in January to 3.15% in February and again to 3.3% in March after seeing £86.2m out of premium bonds in just one month – the first monthly decline in almost 12 years.

Savers poured in nearly £600million in February. If this is repeated in the coming months, the bank will not have much to do to achieve the goal.

But it may stumble, especially if the base rate goes up, because of its recent poor customer service.

Historically, the state-backed bank had a good reputation for service and security and could attract good flows without having to pay high rates.

But that was badly shaken during the pandemic when he tried to abolish Premium Bond price checks and made savers wait to withdraw their money after a series of rate cuts.

A spokesperson for The Savings Guru, an analyst, said: ‘His recent poor customer service is more likely to be a reason why he has to pay higher rates. You may have to buy customers for a while in the hope that they will accept the tariff and forgive the service.

Investors may abandon premium bonds because rising rates mean they can get a higher guaranteed rate elsewhere. Core fixed rate bonds are now yielding over 4%, compared to 3.3% for premium bonds.

That means savers have to sacrifice higher interest to stick with premium bonds in hopes of winning a prize.

A study by Paragon Bank highlights how savers are turning to fixed rate savings. In the final three months of last year, more than £180.5bn was paid into these types of accounts, almost a fifth more than in the previous three months.

Laura Suter, of stockbroker AJ Bell, says NS&I struggled during the savings war, with many opting to withdraw their money and transfer it to higher-paying rivals.

“The increased target means it will have to make its products more attractive to savers, which equates to higher interest rates and another boost for the Premium Bond Price Fund,” says -She.

Sarah Coles, personal finance manager at Hargreaves Lansdown, said: ‘The higher funding target means there is scope for higher rates.

If the Bank of England raises interest rates further, we can expect NS&I to raise rates to avoid falling too far behind the rest of the market.

The big advantage for savers – especially those with large balances – is that all their money with NS&I is guaranteed by the government rather than the £85,000 limit with other providers under the Financial Services Compensation Scheme.

sy.morris@dailymail.co.uk