Newly-nationalised Northern Rock could be set to add to already intense competition for savers.
The bank, whose deposits are 100 per cent government guaranteed following last year’s run, said it is looking to attract savings inflows and that accounts could be backed by the state safeguard for as long as 4 years.
The plan is part of restructuring proposals to repay its £25bn Bank of England loan over the next 3 to 4 years, shrink its mortgage book and fund more of its loans with deposits.
Both new and existing savings would continue to be covered by the government guarantee for the same period, said a Northern Rock spokesman, with any change subject to three months’ notice.
The bank currently offers rates up to 6.25 per cent which some experts believe could also rise even higher as the bank seeks to attract more funds.
Rival savings providers this week said the business plan would leave the bank with an unfair advantage. Adrian Coles, director general of the Building Societies Association, says: “This does little to allay our fears of unfair competition from the taxpayer-funded bank…It is unacceptable for Northern Rock to build market share via a combination of artificially high interest rates and government guarantees to savers.”
But while competitors are crying foul, the plan to boost inflows is “great news for savers,” says David Black, principal banking consultant at industry analysts Defaqto. “Northern Rock has got to attract funds and is offering premium rates. If they’re offering a cracking rate, then take it”, he says.
Rachel Thrussell, head of savings at Moneyfacts, the rate monitor, says that it would be “extremely difficult” for the bank to justify launching market-leading accounts given its near-unique security. “(But) if they’re looking to attract savings their only option is to put up rates,” she adds.
The Northern Rock spokesman said the bank’s business plan was provisional and had yet to be approved by the government and the EU, and declined to say whether any rates would be increased. The bank also claims it will not use its government guarantee to compete unfairly.
“We’re not going for market leading rates across the board,” he said.
The cast-iron safeguard for Northern Rock savers compares with the normal industry safety net covering 100 per cent of up to £35,000 only. Savers with the bank’s offshore accounts in Guernsey also benefit from the full state backing, whereas other deposits in the Channel Islands have no third-party safety net.
Experts said that while Northern Rock’s accounts are not the highest paying of their kind, deals that are still competitive on rate included the internet-operated Tracker Online and, for the over 50s, Silver Savings Online, both offering 6.25 per cent.
Savers are already benefiting from strong competitition for deposits across the market as a result of the credit squeeze. With banks and building societies finding it more difficult to raise wholesale funds, best-buy returns have been buoyed up even as base rates have been coming down.
Top easy access and notice accounts are currently paying 6 to 6.5 per cent, while fixed-rate bonds are offering as much as 6.7 per cent, according to Moneyfacts. Black says an “absolutely astonishing” feature of the savings market is that so many accounts are paying more than base rates, currently 5.25 per cent, while fixed rates offer “particularly outstanding value”.
