Savings: Interest rates continue to plummet

Posted on October 4th, 2012 | Categories - News

UK Savers are being hit by a wave of interest rate cuts, caused partly by a new scheme to encourage banks to lend to mortgage borrowers and small businesses.

The interest rate cuts, of up to a tenth over the past month, have hit all types of savings accounts, including fixed rate cash ISAs, SIPP deposit accounts, and deposit accounts for businesses.

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According to research by Moneyfacts, the average return on a one year fixed rate bond has fallen from 2.77% to 2.57% over the past two months. Whilst a two year fixed rate bond has fallen by more, from 3.29% to 3.01%.

We have previously written about how interest rates on deposit accounts for SIPPs have fallen consistently over the past couple of months, you can read this article by clicking here, however it is clear that all savers are now being hit.

Why are savings rates falling?

Experts believe that there are a number of factors behind the recent steep cuts in interest rates including a reduction in ‘swap’ rates, the need for banks to repair their balance sheets and return to profitability. However the introduction of the Funding for Lending Scheme (FLS) seems to be behind the most recent cuts.

The FLS, launched by the Bank of England and the Treasury, is designed to provide banks with a cheaper, and more accessible, source of wholesale funding, which they can then lend on to personal and business customers.

However, the introduction of the FLS means that banks are less reliant on saver’s deposits to fund their lending and can therefore get away with offering lower interest rates to savers.

Beware inflation

Low interest rates have been plaguing savers for nearly four years, as the Bank of England keeps base rate low in an effort to help the economy.

Since the financial crisis of 2008 inflation has also been an issue, meaning many people have struggled to get a real return on their savings. Indeed, research from the UK’s largest building society, the Nationwide, concludes that UK savers have lost £85 billion due to interest rate cuts.

Whilst inflation is currently on a downward trend experts are warning that savers should still be cautious. Despite Bank of England predictions to the contrary, many people feel that inflation could start to rise as we move into 2013 and with interest rates falling savers might well find the problem of getting a real return, after tax and inflation, rears its ugly head again.