Should you buy the new NS&I bond?

Savers can put between £100 and £3,000 into NS&I's Investment Guaranteed Growth Bonds, which have a three-year term and are available until 10 April 2018. They are open to anyone over 16, in contrast to NS&I 65+ Guaranteed Growth Bonds, which were available in early 2015 and restricted to savers aged over 65. Savers can access the NS&I Investment Guaranteed Growth Bonds before the three-year term is up, but face a penalty equivalent to 90 days' interest on the amount they cash in.

NS&I Investment Guaranteed Growth Bonds' interest rate of 2.2 per cent far exceeds the average interest rate of 1.25 per cent available on three-year bonds from other providers. One of the best rates available from other providers is the 2 per cent on offer from Secure Trust Bank Fixed Rate Bond 3 Year Term (Series 12).

However, the rate of 2.2 per cent puts it behind the current rate of Consumer Price Index (CPI) inflation, which is 2.3 per cent for March 2017. Although CPI held firm between February and March, it remains at its highest point since September 2013, when it reached 2.4 per cent.

This means that anyone saving into the new bond will lose money in real terms, and if inflation continues to rise they could lose even more. CPI is higher than in December 2016, when it was 1.8 per cent, and a number of analysts predict that it will peak at 3 per cent by the end of 2017.

There are plenty of reasons to believe CPI could keep heading upwards. CPI was 0.6 per cent in January 2016 and since then the impact of weak sterling and the recovery in the oil price have pushed the figure upwards. The March rate of 2.3 per cent was influenced most by weak sterling feeding into food, alcohol and clothing prices. Those who believe inflation will rise further argue that the impact of higher import prices has further to run, although others highlight weak wage growth.

"Inflation is expected to peak at 3 per cent over the next three years," says Adrian Lowcock, investment director at Architas. "And that seems more than achievable, although inflation is very hard to predict. While we believe we have seen the majority of the falls in the pound following the [vote for] Brexit, the knock-on effects of higher import prices will continue to be felt for some time."

The impact on returns from a three-year bond would depend on the speed at which inflation picked up and the length of time it remained at a peak.

Mr Lowcock says: "If inflation rose to 3 per cent but then fell back quickly to around 2 per cent, someone holding a three-year bond could still feasibly have one or two years of inflation-beating returns. If inflation does reach 3 per cent and stays there for three years you would lose 0.8 per cent of your value on the NS&I Investment Guaranteed Growth Bond per year, which is not that bad when you look at the rates offered elsewhere."

Although you may be tempted to keep your money in instant-access accounts in the hope that rates improve, you could be waiting a long time. Also, inflation might not continue to rise, and if it does peak it could easily fall back again within three years. So you could easily have more than one year to earn a reasonable, market-beating return on your savings.

Getting the best rates

One of the best instant access cash Individual Savings Account (Isa) rates currently available is 1.05 per cent, with the Coventry Building Society Easy Access Isa and Royal Bank of Scotland Instant Access Isa.

After Secure Trust Bank and NS&I's offerings, the best rate of interest on a three-year bond is 1.91 per cent offered by OakNorth Bank's Personal Fixed Term Deposit account.

You can beat all those rates by locking up your money away for five years. For example, Sweden's Ikano Bank offers a rate of 2.35 per cent on its five year fixed rate bond, but the longer term means even more risk of your savings being eroded by rising inflation.

You can find good rates with some of the challenger banks that have recently started operating in the UK market.

But Mr Lowcock says: "I would be very wary of tying your money up for as long as five years unless you are getting a very good rate."

Best instant-access cash Isa rates

Source: Moneyfacts

Best five-year bond rates

Source: Moneyfacts