Is the Government to blame for falling savings rates?
Savings rates are plummeting and a new Government scheme could be to blame.
The rates on savings accounts have been falling for quite some time now, making it pretty much impossible to get a good return on your cash.
With inflation sailing around the 2.5% mark for a while (though it fell this week to 2.2%) and the base rate at a record low, there aren’t many places where you can find a good savings account.
Add to that, when you do find a decent rate, there’s no guarantee it’ll be around for long as many accounts, particularly those in the instant access market, have steadily cut the interest rate they pay.
Why are rates so low?
Along with the pretty dire state of the economy, high inflation and a low base rate, the Government’s Funding for Lending (FFL) scheme has come under fire as one reason savers are getting such poor returns.
Over the past year the financial crisis and problems in the eurozone have made it hard for banks to access money on open markets. This has led to a tightening in conditions and criteria for banks dishing out loans such as mortgages.
To combat the problem the FFL programme has been designed to provide a much-needed boost by making cheaper loans available to both businesses and individuals.
It’s run by The Bank of England and allows banks to borrow the equivalent of up to 5% of their loan books, and this could rise in the future. Right now 13 companies have signed up, including Barclays, Santander and RBS. When The Bank of England next releases a list of companies at the end of October, it's expected more will have joined.
Plummeting savings rates
As the banks now have the opportunity to borrow at a cheaper rate from the Government, there is less need for them to get their cash from savings customers. And that’s why rates being offered are a lot less competitive now than they were even a few months ago.
Rachel Springall, spokesperson for Moneyfacts, said banks appear to be losing interest in attracting deposits from savers recently, perhaps due to the fact that they can get cheaper funds from the Government via its FFL scheme.
The Bank of England wasn't able to confirm this. Rob Elder, spokesperson for the BoE, told me that by reducing funding costs, the FFL scheme should allow banks to increase lending to UK households and firms. This should boost spending in the economy, and so help to create jobs and raise incomes.
Financial institutions are also being quiet on the issue and many, such as Nationwide, categorises the FFL as an ‘industry issue’ and therefore doesn't comment on it.
However, Nicola Hussey, spokesperson for Santander, explained that retail deposits still remained key in the bank’s funding and as FFL was only 5% of an institution’s total assets, it hadn’t acted to reduce rates on instant access savings accounts.
“We constantly review our savings range in line with market conditions and competitor movements to ensure we remain competitive," she aded.
How have rates changed?
Instant access account rates have been tumbling for a while and in October the average rate was 1.04% compared to 1.07% in July.
Rates on fixed rate accounts are also creeping downwards and this table demonstrates how much they’ve dropped since July.
|
Month (2012)* |
1-year bond |
2-year bond |
3-year bond |
4-year bond |
5-year bond |
|
July |
2.70% |
3.34% |
3.39% |
3.73% |
3.88% |
|
August |
2.77% |
3.29% |
3.34% |
3.69% |
3.79% |
|
September |
2.64% |
3.17% |
3.26% |
3.64% |
3.73% |
|
October |
2.357% |
3.01% |
3.08% |
3.33% |
3.58% |
*source:Moneyfacts
What’s the best rate right now?
If you are hunting for a place for your savings, the market isn’t positive. But there are still good accounts to be found which will pay you more than keeping the money in your current account.
For example, in the instant access market, Nationwide is a decent bet with its MySave Online Plus account paying 2.75% on anything over £1,000, though you can only take one penalty-free withdrawal in the year.
Derbyshire Building Society pays out the same amount and also requires £1,000 but you have total flexibility when it comes to deposits and withdrawals. If you don’t want this much money in an instant access account, Principality’s offering - which pays a higher rate or 2.85% - can be opened with £1.
More on savings:
The top alternatives to ING/Barclays
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Comments
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YES AND NO All the banks are in big trouble - shame. Dodgy loans on non existent developments, PPI repayments, hefty fines for fixing the libor rate, or as in the case of HSBC, for money laundering in the States. The last thing they need is up to 30% of existing home owners with a mortgage handing back their keys because of high interest rates!!! For ten years the banks handed out dodgy loans to anyone that could sign their name, including Donald Duck & Mickey Mouse and Joe public resented central government (good old Gordon B) bailing them out with public money. Reducing the income on your savings (good old David C.) is propping up bad mortgages, which in turn is propping up the banks rather than central government bailing them out with your hard earned tax money. THE PHRASE HEADS I WIN, TAILS YOU LOSE SPRINGS TO MIND!!!
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Ironic isn't it, the people that overspent and over borrowed were blamed for the crisis yet now the more sensible and prudent are paying for it to get them off the hook. They can blame the bankers but good old Gordon was largely to blame. Why isn't he in the dock for his irresponsible and reckless management of the country. Just think if Scotland had been given independence 10 years ago he would have been in the Scottish parliament and would have only wrecked his own country instead of ours as well!
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No, Government is not to blame. FEAR is the winner here! As I see it, everyone (from business to consumers) has pulled in their horns by hoarding cash, with the result that the cash is not being spent to keep the economy moving and so interest rates are being kept low in a rather desperate attempt to kick-start the economy. The reasons for hoarding cash are many and complex. Over-indebted consumers may be hoarding cash to pay down their debts; companies may be unwilling to spend cash to invest in new products if they perceive that cash-less consumers won't buy them. I agree with Timperly that bank balance sheets are likely to be fragile because there are over-extended consumers paying off mortgages they can barely afford - as an aside, I am very concerned about the interest-only mortgages that homeholders were taking out at the height of the housing bubble, and how these will be re-paid. So it is not in the banks' interests to have high interest rates (and thus high savings rates), lest you have many distressed home-owners who cannot afford to keep up their mortgages.
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06 November 2012