NS&I, the government-backed savings scheme, has increased the rate on its Junior Isa to 2.5 per cent.
The account, which can be opened and managed online only, has seen its rate increase by 0.25 percentage points.
Jill Waters, NS&I retail director, said: "NS&I is committed to engaging with young savers and giving parents and guardians a simple and straightforward way to invest for their children.
"We launched our Junior Isa in August last year and have today (12 March) increased its interest rate to 2.5 per cent to make it more competitive.
"As well as offering young savers and their families an improved interest rate, and the benefit of our 100 per cent Treasury guarantee, we are proud to offer our Junior Isa through nsandi.com, which is simple and straightforward to use, and also cost-effective."
However, the NS&I product is still not the most competitive cash savings product in the Junior Isa space.
According to Moneyfacts, Coventry Building Society offers 3.5 per cent on its Junior Isa, while Nationwide offers 3.25 per cent.
The Junior Isa subscription limit for this tax year is £4,128, and will increase to £4,260 next tax year.
Financial adviser Carl Roberts, from RTS Financial Planning, said the NS&I product is a decent rate for cash if the timeframe for the child withdrawing the money is short.
But he said if the child is very young and therefore has a long investment timeframe the parents should really be investing.
Patrick Connolly, head of communications at Chase de Vere, said: "It is positive news that NS&I is increasing the interest rate on its Junior Isas. However, there are better rates available from other providers and for most people saving on behalf of children it is a better approach to invest in stocks and shares rather than in cash.
"This is because most children's savings are for five to 10 years or longer and most people saving into Junior Isas will be paying in regular premiums, which helps to negate the risk of market timing."
