Savers squeezed as rates fall below 1%
Savers have seen their interest rates fall to the lowest levels seen since records began, with many accounts now paying less than 1%.
At the end of December, official figures show that average rates on instant access and notice savings deals are now around 0.8%, down from highs of over 6% seen in the late-1990s.
According to the Bank of England, which has been recording monthly average savings rates since 1995, average instant access rates were 2.46% at the end of September but - just three months later - stood at 0.81%. Meanwhile, notice savings accounts have fallen from 3.24% at the end of September to just 0.82%.
Rates on cash ISAs have more than halved over the same period, from 4.49% to just 2.09%.
And savers should expect to see their rates dive even further as a result of January’s 0.5% interest rate cut, which is not accounted for in these figures.
Meanwhile, some savers have seen their interest rate fall to 0%. Julian Hodge Bank’s easy access savings account pays 0.5% AER on deposits over £10,000 but 0% only any balances under this amount.
Cypriot bank, Laiki Bank, also pays zero interest on its instant access account with a £5,000 balance while Bank of Ireland pays 0.001%.
Finally, West Bromwich’s Bonus Saver account’s interest rate, excluding the 2% bonus, has also fallen to 0%.
However, Roger Smith, group development director at West Bromwich, says that savers will only lose their 2% bonus rate it they make more than the permitted six annual withdrawals. As it currently stands, 97% of customers are earning 2% on their savings.
Rates on fixed interest accounts have fared better, although Bank of Ireland is currently only offering 0.95% interest to new customers.
Darren Cook, spokesman for data provider Moneyfacts, predicts more providers will cut rates to less than 1% in the months ahead.
“There is only so far savings banks can push interest rates down and we will see a big watershed between accounts paying less than 1% and those players offering more attractive rates,” he says. “Some banks and building societies are still keen to bring in savings customers and so not all accounts will have their rates slashed.”
Indeed, the fact that there are still savings accounts paying 5% AER is more of a surprise than the fact that some pay less than 1%.
Cook says that with the Bank of England base rate at 1.5%, saving rates should be around the 1.25% mark. However, the high cost of funding for banks means it is still cheaper for them to offer savings accounts paying more than this than borrowing from the money markets.
West Bromwich’s Smith says: “There will be an increase in the number of accounts paying just above 0% but there is still demand for savings customers among some banks and societies so rates will be supported to an extent.”
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.