Isa interest rates hit new record low

Piggy bank Only one cash Isa currently beats the CPI inflation rate of 2.7%

The average interest rate being offered by a cash Isa (individual savings account) is now just 1.74%, according to Moneyfacts.

A year ago, the average was 2.55%, but it has fallen because banks and building societies now have access to cheap money via the Bank of England's Funding for Lending Scheme.

FLS was launched last year to stimulate lending and stave off recession.

But a side-effect is that lenders have less need to attract cash from savers.

Sylvia Waycot of Moneyfacts said: "New Isa accounts normally hit the market with a flurry of razzmatazz in early January, but we are already in February and only a few accounts have trickled quietly into the market."

"Normally we would expect to see providers trying to grab our attention with headline rates but this year, whilst rates on some accounts have gone up, they have not generally risen by as much as they were recently reduced by."

Personal finance commentator Andrew Hagger said: "Barely a day goes by without the launch of another record low mortgage deal. Only last week we saw HSBC offering a two-year fixed rate at 1.98% and Tesco Bank just 2.89% fixed for five years.

"But while homeowners are eagerly filling their boots and remortgaging to ultra-cheap home loans, savers have watched in vain as a huge chunk of their interest income has been wiped out."

Recent alternative figures from the Bank of England confirmed that cash Isa rates are at their lowest level yet.

It found that the average rate for a cash Isa, including any guaranteed bonus, stood at 1.85% in December 2012, while the average rate for a cash Isa without any bonus was 0.88%.

Both have fallen noticeably from last August when the rates stood at 2.6% and 1.42% respectively.

In both cases the rates on offer, even with the advantage of paying no income tax, were still below the current rates of inflation, whether measured by the retail prices index (RPI) or the consumer prices index (CPI).

In December the CPI stood at 2.7% and the RPI was at 3.1%, so anyone saving in the average cash Isa will, at current levels of inflation, see the real value of their money eroded in the coming year.

Moneyfacts said that the only Isa account currently paying more than inflation comes from the Coventry building society, at 2.8%.

Among the best of the rest, the Earl Shilton pays 2.7%; both the Chorley & District and the Cheshire pay 2.5%; and the Melton Mowbray pays 2.4%.

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