NS&I is seeing an upturn in customers depositing money with it.
Interest rates have been raised on an instant access savings account offered by the government savings organisation National Savings & Investments (NS&I).
The account, known as an income bond, will benefit from a 1% rise in its interest rates from Wednesday.
Deposits of between £500 and £24,999 will be paid 1.7% a year while those of £25,000 or more will be paid 2% a year.
NS&I said it was trying to compete with savings accounts of rivals such as banks and building societies.
The income bond accounts, which are different to NS&I's fixed-rate guaranteed income bonds, pay interest monthly.
They currently have 300,000 customers, with just over £8bn invested.
The financial information service Moneyfacts said the new rates would be very attractive to potential savers and would go into its best-buy tables "for the first time in years ".
NS&I said the move had been made "to take into account the rates available on other types of products which might be considered by income bond customers".
But the decision is unlikely to be welcomed by rival savings institutions such as banks and building societies.
In April the Council of Mortgage Lenders complained that its members were having trouble attracting savers' money because NS&I's rates, combined with its 100% government guarantee, were proving too attractive to high street savers.
That point was repeated on Wednesday at the annual conference of the Building Societies Association in Yorkshire.
"Societies face intense, and I would say unfair competition, especially on retail funding, from the range of fully nationalised, or majority government -owned banks, together with National Savings, all of which are perceived to have, explicitly or implicitly, a total government guarantee," said the BSA chairman John Goodfellow.
Lenders say this is inhibiting their ability to offer more mortgages to borrowers.
Since the near collapse of the Northern Rock in 2007, and the subsequent turmoil in the banking industry, NS&I has been particularly successful in attracting money from savers seeking a completely safe home for their money.
In March, NS&I reported that its 27 million customers had saved just over £19bn more with it in the first nine months of the last financial year.
That was more than the inflow in the whole of the 2007-08 (£15.5bn) and during 2006-07 (£14.2bn).
According to Moneyfacts, higher rates of interest for an instant access account can now only be found at the Stroud & Swindon and Chelsea building societies.