Interest rate cut: What it means for savers

Friday, 09 January 2009 10:42

While borrowers are hoping the latest interest rate cut will mean cheaper repayments, savers are seeing their returns rapidly diminish.

Just a few short months ago, savers were riding high as banks sought their cash, but now the average rate has hit 1.48 per cent - and that was before the latest cut.

Although banks and building societies still want to encourage customers to save, they will not be able to ignore the lower base rate.

The Building Societies Association (BSA) admitted savers will "bear the brunt of today's decision".

"Already savers have seen their interest payments cut as a result of earlier base rate reductions and while societies will want to help their saver members where they can, it will be difficult for them to ignore completely today's announcement," a spokesperson said.

"Interest rates are going to see a fall because of today's reduction," said Clare Francis of Moneysupermarket.com.

"But there is still such a discrepancy between the best savings rates and the worst, savers can take advantage of the leading deals."

At the moment, the best savings rates are at around four per cent, and these will soon fall by around 0.5 per cent following the Bank of England's decision, Ms Francis warned.

The lower rates are not likely to put savers off, however.

Ordinary savers are unlikely to move their cash to higher-risk investments such as equities as most are more interested in keeping their nest egg safe, and the threat of redundancy may actually encourage more people to squirrel their cash away, Ms Francis added.

However, pensioners will be hard hit by further cuts, Age Concern has warned.

"Many older people who rely on the interest from modest savings to top up their income will be anxiously counting the cost of recent cuts, particularly as so many are already struggling to pay high household bills," director general Gordon Lishman said.

With analysts predicting interest rates could fall all the way to zero, savers may wonder whether interest on their accounts may disappear altogether - or if banks start charging to hold an account.

"There is no possibility banks would start charging," a spokesperson the British Banking Association (BBA) said.

"It is possible that interest rates could fall all the way to zero, but that would not encourage savers to deposit their money with banks."

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