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Poor Cash ISA Interest rates despite high interest rate futures

Personal_Finance / Investing Oct 17, 2006 - 01:00 PM GMT

By: Nadeem_Walayat

Personal_Finance

Whilst interest rate futures have rallied to the previous highs set in 2004, one staple investment vehicle has dismally failed to benefit from the raises. The range of Fixed Rate Cash ISA's currently on offer range from 5% to 5.25%, whereas in the lead up to the 2004 peak in interest rates, Cash ISA fixed rates ranged upto 6%. The difference is further exacerbated by the fact that Non Cash ISA Fixed interest bonds currently range upto 6% as one would expect and inline with what transpired in 2004.

Poor Cash ISA Interest rates despite high interest rate futures


So why the difference ? Why are the Cash ISA's rates so poor ? The obvious answer is that the Banks and Building Societies want to steer customers away from ISA products and into their other investment products including fixed interest bonds, regular savings accounts and stock market linked bonds.

But why would they do that ? As the ISA market has matured, more and more ISA holders look to transfer Cash ISA's between providers, this tends to increase the costs involved in managing ISA's where the £3k annual balance means that there is little if any room to make a profit on ISA accounts. This is probably the main reason why ISA providers have become reluctant to offer rates that entice customers to transfer to or later to transfer out from.

Therefore the best cash isa's at the moment are the variable rate ISA's such as NS&I Cash ISA paying base rate plus 0.55% until April 2008.

Nadeem Walayat

(c) MarketOracle.co.uk 2005-2006

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