Savings rates continue to tumble

The base interest cuts that have been applied by the Bank of England over the past few months have been welcomed by many borrowers and industries, and for many homeowners and borrowers the base rate cuts have left them with far more money in their pocket each month as a result in a drop in repayments.

However, there are also those that have suffered the adverse effects of the base rate cuts, and one of these groups is savers – a group that is helping to boost mortgage lending for many financial institutions through the depositing of cash.

In fact, the news for savers has been very bad over the past couple of months, as savings interest rates have tumbled to record lows, which means that those depositing their hard earned cash into one of a variety of popular savings accounts are now getting minimal returns on their cash. The Bank of England has said that some of the most common types of savings accounts have seen rates tumble to record lows, and this could put people off using these savings accounts altogether.

The base interest rate has fallen from 5 percent in October to just 1 percent earlier this month, and banks have wasted little time in slashing the interest that they pay to savers. Figures showed that branch based notice accounts were paying just 0.29 percent in January, and this compared to 3.9 percent in January of last year. On instance access accounts the average rate of interest paid now is just 0.51 percent compared to 2.77 percent a year earlier.

Even the tax free ISA has seen the average rate of interest paid tumble, falling from 5.06 percent twelve months ago to just 1.38 percent this January. In fact, these ISAs were launched in 1999, and this is the lowest rate that has ever been paid with this sort of account. The abysmal returns that savers are able to receive on their cash means that many will be put off saving, and already there has been a sharp decline in the amount of money being paid in to accounts.

The data in the recent report did not show the changes that may have taken effect after the latest cut earlier in February, so the figures for the next report may be even worse. Many savers are now keen to get their money out of these low interest accounts and place it elsewhere, and this could prove disastrous for banks and building societies, as they rely on the deposit of money from savers to fund their mortgage lending operations, which is a sector that is already struggling due to restricted liquidity in the financial markets.

Officials have also said that January saw the biggest drop in the amount of money being paid into savings accounts since records began in 1997, and over the course of the month savers took around £2 billion from their savings accounts putting banks on red alert as their access to funds diminished even further. One industry official said that he was not surprised at the action that many savers were taking given the paltry rate of interest that they were receiving on their money.

He said: ‘They are looking at the returns they are getting and thinking they are diabolical. There was a big shift in January, and February is running on a par with January. There is also nervousness about the banking system, so people are withdrawing cash.’

Tags: industry, building society, bank of england, account, ISA, action, Mortgage loan, savings rates