Savings: Bank of England move to boost savings interest rates?

Posted on November 28th, 2013 | Categories - News

iStock_000006918404XSmallA joint move by the Bank of England and the Treasury could boost interest rates for savers.

It was announced today, that from January next year, the Funding for Lending scheme will no longer be available to support mortgage lending, which could mean interest rates on savings accounts rise in the New Year.

The scheme, first launched in August 2012, was designed to make it cheaper for banks and building societies to borrow money, by making £60 billion available to them at low rates of interest. The money they raised from the scheme is then lent to businesses and home buyers, with the aim of making finance more accessible and reducing interest rates.

Savers pay the price

Since the introduction of the scheme, mortgage interest rates have fallen significantly, but savers have paid the price. With a far cheaper option available to them, most banks and building societies reduced the interest rates they paid to savers, one of their traditional sources of capital.

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Since August last year, the mortgage and housing market has also been buoyed by the introduction of the Help to Buy scheme this year, which has boosted mortgage lending as well as the number of purchases, whilst also pushing up property prices.

Presenting the Bank of England’s latest Financial Stability Report, Mark Carney, said that supporting mortgage lending “was no longer necessary”.

Mr Carney continued: “The changes announced today refocus the Funding for Lending scheme where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”

At the same time, George Osborne, said: “Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focusing the Funding for Lending Scheme to support them.”

The move by the Bank and the Treasury comes at a time when concern is mounting that the housing market is overheating and prices rising too fast.

Good news for savers?

The announcement that the Funding for Lending scheme will no longer be available to support mortgage lending is potentially excellent news for savers.

When the scheme was introduced, banks and building societies cut interest rates on savings accounts making it almost impossible for savers to get a real, above inflation, return on their cash.

As this source of cheap finance dries up it would seem logical for the rate cuts of the past 15 months to be reversed.

Only time will tell whether or not this turns out to be the case; but for savers, the light at the end of the tunnel just got a little closer and brighter.