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Is Sunak about to make a big announcement on NS&I green bonds?

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Laith Khalaf, financial analyst at AJ Bell, discusses reports today that the Chancellor is set to announce details for £15 billion of Green Savings Bonds.

Laith Khalaf, financial analyst at AJ Bell, comments:

“The new NS&I bond the Chancellor is planning will give savers the option of a green home for their cash, but its success will likely be determined by the interest rate on offer. Savers showed they’re willing to vote with their feet when NS&I cut interest rates across a swathe of accounts last November, and if the green savings bond offers a paltry rate of interest, it might fail to ignite demand from the public. On the flip side, if the interest rate is too high, it will raise questions about the cost to the taxpayer, because the green savings bond is ultimately just government borrowing by another name. Savers won’t be investing directly in renewable energy projects, rather they’ll be lending money to the government to do so, in return for interest on their money.

“Of course, thanks to the Bank of England’s QE programme and ultra-low interest rates, the government can borrow money extremely cheaply, currently around 0.4% per annum for 5 years. Any premium offered by the green savings bond above prevailing gilt yields is effectively an extra burden for the taxpayer, and costs incurred in this way will naturally be weighed up against other fiscal decisions taken by the Chancellor to repair the nation’s finances in the wake of the pandemic.

“NS&I is permitted some slippage in its financing in terms of the cost to the taxpayer against the gilt market. For this year the Treasury has asked NS&I to target a maximum cost above gilts of £900 million on £6 billion of borrowing. That itself is a historically high amount of leeway, and still doesn’t suggest a huge amount of extra headroom to provide inflation-busting returns for savers. However, like George Osborne’s Pensioner Bonds, the new green savings product will probably fall outside the usual framework for determining whether NS&I is delivering value for money, in order to put bums on seats.

“The long term nature of funding green energy projects also means the Treasury will need to give some thought to how long the new savings bonds will keep savers’ money locked up for. Presumably the government won’t want money flowing in and out regularly, so an instant access account doesn’t look feasible, and a product that locks up savings for say five years looks more appropriate. The longer the government asks savers to keep their money in the bond, the less take-up they are likely to get without offering a seriously big slice of interest.

“We’ve seen growing demand for ESG investment funds in recent times, with inflows into this sector reaching a record £10 billion in 2020, compared to £3 billion in 2019, according to Investment Association data. The new NS&I bond will be a litmus test to see if there is appetite in the savings market for sustainable products on a big scale. In theory a green NS&I bond is a great idea which will give consumers the option of an environmentally friendly savings account from a trusted provider. But the Treasury faces challenges in the design of the bond to ensure it hits the mark with savers, and at the same time doesn’t cost the taxpayer too much money.

“Sunak is between a rock and a hard place here. If he hikes rates up for the green bond, he’ll face criticism for needlessly spending money when government borrowing is already sky high. If the Chancellor opts for fiscal prudence, it may be that the ability to save in a way that helps green causes, together with the security and brand of NS&I, is able to overcome any quibbles over the interest rates on offer. But with rising inflation a clear and present danger to cash returns, consumers may well be picky about the interest rate they get on their money, particularly if it’s locked away for the longer term.”

 

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