Despair for prudent savers as Bank of England cuts interest rates to 0.5%
Prudent savers are despairing after interest rates plunged close to zero per cent following the Bank of England decision to slash interest rates to a new all-time low of to 0.5%.
According to the financial information service Moneyfacts, the average variable savings rate, across all banks and building societies, stands at just 0.96%. Some accounts are already paying dire rates of interest as low as 0.001 per cent, perilously close to zero. These so-called “savings sinners” pay just 5p before tax in annual interest on a balance of £5,000. After tax, it is worth just 4p.
But critics of the Bank of England’s move raised concerns that, with returns on deposit accounts already an all-time low, people would be put off saving, further reducing funds available for mortgage lending.
It is worrying that people who are relying on interest from hard-earned savings seem to have no alternative but to watch as providers collectively and progressively cut their savings rates," said Darren Cook of Moneyfacts.
Bank of England itself voiced a concern when it announced its sixth consecutive rate cut. "The Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system, " said the Bank.
The Council of Mortgage Lenders (CML) said the Bank's latest cut presented "enormous challenges" for lenders. "Savings are the lifeblood of mortgage lending, and unless lenders can offer competitive rates to savers their ability to offer new mortgages is restricted," said the CML's director general, Michael Coogan.
Roger Ramsden, chief executive of Saga Personal Finance, said: “The recent rate cuts have had limited effect on the economy other than supporting those on variable-rate mortgages. The cuts have hit savers hard, particularly those in retirement who rely on monthly interest.”
Adrian Coles, director-general of the Building Societies Association, said: “The rate cut is an assault on savers who will have seen their interest payments drop by 83 per cent since July 2007. Savers dependent on interest income have not seen prices fall by a similar amount – their lifestyles have taken a significant blow.”
"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.
"While the decision will be of benefit to some borrowers on variable rate or tracker mortgages, the reduction in repayments that they will see will not outweigh the negative impact that the reduction in mortgage funding will have on the market as a whole."
Vince Cable, the Liberal Democrats Treasury spokesman, said: "Small private investors are stuck with rates that are paying next to nothing. It would be an utterly bizarre situation if savers ended up paying their banks to look after their money but it could happen if banks are trying to maintain their margins."