Calls for interest rate freeze

3 February 2009

Savers are in real danger of seeing the returns on their nest-eggs drying up altogether if the Bank of England cuts the base rate again this week.

On Thursday, the central bank’s Monetary Policy Committee (MPC) will meet to discuss the outlook for inflation and economic growth, and vote on whether a further base rate cut is warranted. The MPC has cut rates by a total of 3.5% since October; it started by reducing the base rate by 0.5%, before implementing a surprise 1.5% reduction in November.

In December rates were slashed by 1%, but in January a more moderate 0.5% cut was decided upon. The base rate currently stands at 1.5% - its lowest level in the Bank of England’s 300-year history.

Many economists have predicted that the base rate could be reduced further and even potentially fall to zero, as a result of the recession. With inflation falling, the MPC’s focus is likely to continue lowering interest rates to spur economic growth, help businesses and consumers.

However, historically low interest rates have been a major blow to savers and pensioners, and with only a proportion of borrowers benefiting from rate cuts, concern is mounting that rates should not be cut any further.

Adrian Coles, director general of the Building Society Association, points out that interest rates on savings accounts have plummeted in the past few months; interest rates on fixed-rate deals were 7% or more in early autumn, but are now closer to 4%, while average rates on instant access accounts are less than 1%.

This means many people have seen their incomes from savings drop by almost 75%, says Coles.

“The cuts in interest rates have had a severe impact on savers,” he adds. “This drop in income is particularly serious for pensioners who have saved all their lives and now face a sharp reduction in their income and living standards. For pensioners dependent upon interest income from their savings [to supplement their pension], prices would have to fall by an unimaginable 75% for them to maintain their living standards.”

Coles says the MPC must refrain from making further cuts to the base rate until the impact of its previous reductions becomes clearer.

Although inflation is now starting to fall back from its 5.2% peak in September the cost of living is still rising by 3.1% a year - so for many people, energy bills and food costs remain high. British Gas recently cut the cost of its standard tariff by 10%, but so far none of the other five energy giants have unveiled price cuts.

According to, 78% of people have been using their heating less than they would like in order to offset the cost of gas and electricity.

Scott Byrom, utilities manager at, says: “While encouraging, the recent 10% price cut from British Gas is little relief for those struggling to make ends meet. After the unprecedented price hikes to both gas and electricity bills last summer consumers will need to see further reductions before they can afford their bills.”

Pensioners are particularly vulnerable to high energy bills – and they are also being punished by low interest rates. For one, those attempting to earn an income off their nest-eggs are likely to have seen this reduce dramatically.

Even those people who have their savings in a fixed-rate deal are bracing themselves for a payment shock down the line; rates on fixed savings accounts have fallen dramatically since October, with the top deals paying little over 4% and average rates less than 3% AER.

At the same time, interest rate cuts are also hitting people through the state pension system, according to Dr Ros Altmann, former pensions policy adviser and a governor at the London School of Economics. Means testing for pension credit takes into account all of an individual's retirement savings, including pensions as well as ordinary savings accounts.

However, rather than looking at the actual amount people earn on their savings, means testing assumes people earn 10% interest a year.

“This is robbing pensioners of their benefits,” Altmann adds. “Not only do the medium income pensioners lose out because they earn less on their hard-earned savings, but the government is also denying them pension credit because it has refused to recognise that their savings income is cut.”

There is also concern that further interest rate cuts won't help business. According to the Federation of Small Businesses (FSB), interest rates should be frozen this month until there is clear evidence that this monetary policy is having a beneficial impact on the economy.

The FSB's research suggests that many small businesses have not seen any improvement in their ability to access finance despite historically low interest rates. John Wright, national chairman at the FSB, says that access to finance, rather than the cost, remains a key problem for these small firms.

“These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required," he adds. “The concern now is that if rates are cut any further there may not be too much more room for manoeuvre in the economy.

"The onus is really on the banks to start promoting these lower rates to fire up the economy.”


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