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March 5, 2009 1:32 pm
Six consecutive reductions in interest rates from the Bank of England have left savers struggling to achieve real returns on their money.
Savings providers have been cutting interest rates on existing accounts with each base rate cut, leaving some offering just 0.01 per cent on accounts.
The average rate on instant access savings accounts is now just 0.86 per cent, according to Moneyfacts.co.uk.
The effect of Thursday’s 50 basis point rate cut, to 0.5 per cent, will not be felt until the beginning of next month, but advisers warn that some rates on some accounts could be cut by more than 0.5 percentage points.
Not all providers will cut rates, however. Barclays has said that it will not reflect the latest base rate movement in its products and will retain savings rates at their current level.
The latest cut is likely to lead to further reductions in savings rates and financial advisers say savers are angry that they are suffering while borrowers reap the benefits of lower repayments.
Adrian Coles, director general of the Building Societies Association, called the Bank of England’s decision a “kick in the teeth for savers”.
“It will be felt hardest by the many elderly people who have saved responsibly all their lives and are reliant on their savings interest to maintain an acceptable standard of living in retirement,” he said.
Nine base rate cuts over the past 15 months have all but eliminated income generated from cash-based savings.
Campaign groups have called on the government to protect savers by reforming tax rules and increasing the tax-free annual Individual Savings Allowance, currently limited to £7,200.
The government has said that it will address the situation and help those affected by low savings rates, but has not yet clarified what the help will be.
Alongside the news of the rate cut, the Bank of England also confirmed it was starting the process of “quantitative easing”, with an initial £75bn programme of asset purchases. Under this policy the authorities will buy up gilts either from banks or from the commercial sector.
There are potential benefits from this policy for individuals, as banks will receive cash in exchange for gilts they sell back to the government and the consequent increase in the money supply may lead to an increased volume of lending.
“As the Bank of England is to try quantitative easing, this should, theoretically, encourage banks and building societies to lend more to their customers,” said John Phillips, financial services director at Kinleigh Folkard & Hayward. “This will in turn encourage spending. However, it remains to be seen whether the creation of new money will have any success.”
Robert Sinclair, director at AMI, added: “The most important aspect of the announcement is the Bank of England’s commitment to quantitative easing. AMI has consistently argued that the fundamental problem in the mortgage market has been a lack of liquidity. The £75bn injection announced today should begin to go some way to alleviate this problem.
“In addition to improving liquidity, the government must accelerate the removal of ‘bad loans’ in order to restore confidence in the market place. The need to speed the introduction of the Crosby measures to support lenders and expanding initiatives to a wider group of lenders cannot be over-emphasised. AMI will continue to call for these urgent changes.”
Another benefit is that decreasing the supply of gilts pushes up their price. When gilt prices go up, yields go down, and gilt yields determine long-term interest rates for overdrafts, some fixed-rate mortgage products and most business lending.
However, there are also concerns that the creation of large sums of money out of nothing could produce a period of high inflation, which would not be good for savers.
Personal finance experts say savers should not stay loyal to their existing account, but shop around for better deals. Those who can afford to leave their money untouched for a period of time have been advised to put their cash into a fixed rate account.
The Egg internet savings account currently offers 3.35 per cent, and the Investec High 5 savings account, which tracks the five best paying savings accounts, is offering 3.41 per cent on cash deposits above £25,000. ICICI offers a one-year fixed rate bond paying 3.9 per cent on sums of £1,000 and above.
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