The inflation rate is at an all time low of 0.5% and Mervin King of the Bank of England today announced that it would remain at this level for the time being. The aim is to reach an inflation rate of 2% and avoid falling into deflation. Whilst the low inflation rate gives us increased spending power (and retail spend is increasing) it places severe limitations on businesses and contributes to increases in unemployment rates.

Surprisingly it is still possible to get interest rates of around 5% despite on saving and investment accounts. Michelle Slade of Moneyfacts says that this is a calculated move by the banks to increase funds in order to be able to lend more.

“Continuing volatility in the money markets is seeing providers increasingly having to use their savings books towards funding their lending activities. Most fixed rates investments don’t allow early access, as this guarantees the length of time the funds are available to the provider.”

The housing market has begun to improve and the banks want to be in a position of being able to provide mortgages. To do this they must entice customers in with higher savings rates. Making consumers switch current account or switch savings account is tricky as trust in banks is at an all time low. The only way to tempt customers to move is to offer to increase their saving which suddenly seem more important than they did a few years ago.

Tagged: inflation, interest rates, lending, mortgages, the economy