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Higher for longer? - 03/05/2023

Following a very warm welcome to iDADs inflation linked deposit plan in April, a second issue has been released, expressing a greater demand for protecting investors capital against the effects of high inflation.

Whilst we are seeing an uptick in deposit-based structured products issued following the Bank of England’s hikes in the Base Rate, leading to banks offering higher interest payments – the vast majority of these are linked to the performance of the FTSE 100. The Retail Price Index (RPI) linked deposits from iDAD bring an alternative to not only safeguard capital, but also provide security from real losses caused by inflation.

Consumer Price Index (CPI), the Government’s chosen measure of inflation has increased 20.5% over the last four years. The more traditional measure of inflation, RPI, which is also calculated by the Office for National Statistics is generally higher than CPI having increased 28.8% over the same four years. Over the twelve months to March CPI increased by 10.1% whereas RPI rose 13.5%.

Investment returns play an important role in growing wealth but the effect of high inflation can erode these over time. Lower yielding deposit-based solutions have stood little to no chance of preserving spending power for at least fifteen years. These inflation-linked solutions provide an opportunity to maintain real value of deposit capital by linking the return to RPI. The nearest equivalent is perhaps National Savings Indexed Linked Certificates which are only available to existing certificate holders and since May 2019 the returns have been linked to CPI rather than RPI.

Source: ONS

UK RPI All Items Index

With the same terms as the first issue the iDAD Barclays Inflation-Linked Deposit Plan May Issue will pay interest at maturity after four years equivalent to 100% of the rise in UK RPI between March 2023 and March 2027 with the potential for an additional 2% interest at the end of term if the FTSE 100 is higher at the end of the term. Whilst we could still have high year on year inflation and the RPI itself could decline in the short-term, the Index is currently up 0.74% for the May Issue of the iDAD deposit.

As a deposit-based plan, capital will be returned in full at maturity other than in the unlikely event that Barclays Bank are declared bankrupt and depositors suffer a shortfall - standard Financial Services Compensation Scheme protection limits of £85,000 per eligible person do of course apply.

Forecasts from the UK government, Office for Budget Responsibility and beyond rarely prove to be accurate and whilst there is an expectation for inflation to fall, holders of an RPI linked deposit will be locking in valuable protection of the real value of their savings over the next four years. Even as inflation falls back to more ‘normal’ levels of 2% as targeted by the Bank of England, as long as expected inflation remains in the economy, the deposit will generate an equivalent interest and ultimately maintain its spending power by reference to RPI.

To obtain full details of the iDAD Barclays Inflation-Linked Deposit Plan May 2023 – Issue 2, please click here.

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