Inflation is rising, interest rates are low and there was much relief amongst many savers when National Savings & Investments (NS&I) reintroduced their ever popular Index Linked Certificates.
However Citigroup have criticised the certificates, saying they offer poor value to the government and that they will make it harder for other banks and building societies to attract savers.
We thought we would take a look at both sides of the argument and ask, do Citigroup have a point?
What have they said?
First covered in the Daily Telegraph Citigroup have made two criticisms of NS&I Index Linked Certificates. Firstly saying that the interest rate paid to savers is too high and is an expensive way of the government raising money when a gilt with a similar maturity would cost less.
The second criticism is that due to the attractiveness of the rate offered by NS&I and the tax free status of the Certificates, less money is being saved with banks and building societies. The argument being that this will continue to increase banks and building societies reliance on wholesale funding.
Citigroup said, “While the new National Savings Index Linked Certificates appear highly popular with many investors, we believe they are a bad idea for the government: they are likely to prove a highly expensive form of funding and will hinder the important task of reducing the UK banking sector’s reliance on wholesale funding”
Have they got a point?
From a black and white economic perspective they probably have. At present, the interest rate paid by the government on gilts with a similar term is less than that paid to holders of the Index Linked Certificates.
However, the position could change, if inflation fell, as is predicted by the Bank of England, it is possible that gilts would look more expensive than the Index Linked Certificates as the interest paid out on these would reduce.
The second point is that the attractiveness of the interest rate offered by the Index Linked Certificates will pull money away from banks and building societies, which will impact not only on their profits but also their funding positions.
Again they probably have a point here, we have certainly seen a move amongst our clients to put money into the Index Linked Certificates and they are certainly a cure for the fear of inflation. Although the maximum that can be paid into the Certificates is only £15,000 per person.
Others would argue however that this just a function of market competition. There will always be times when the products of one institution are more competitive than those of another; this is just one of those times.
Banks and building societies may also argue that NS&I is in the unique position of being able to decide which products are tax free which of course they are not.
As things stand there is probably a reasonable argument that it would be cheaper for the government to raise money by issuing gilts, but things could change.
But cold hard economic facts are just one side of the story. Over the past few years savers have been caught in a perfect storm of low interest rates and rising inflation, many see the Index Linked Certificates as part of a solution to this problem. Their tax free status is a bonus too; savers feel as though they “have been given a break”.
Furthermore, the amount of money we are talking about here is relatively small. NS&I are looking to raise about £2bn this year from the sale of Index Linked Certificates this is a tiny proportion of the UK retail deposit sector which is worth more than £1 trillion. Many savers will hope they are here to stay.