Monday 10th November 2008
By Rachel Jones
Know Your Money Editor
The Bank of England made the unprecedented move on Thursday (November 6th) to cut the interest rate by one-and-a-half percentage points, taking it down from 4.5 per cent to three per cent. While the headlines in the media heralded the move as a boost for first-time buyers looking to secure a mortgage, or for struggling households applying for a loan, what does this mean for UK savers? How will the lower interest rates affect savings accounts? And which banks have passed on this cut to their customers?
Following the lead
After what seemed like pressure on all sides for the Bank to commit to an aggressive interest rate cut, the welcome news from the monetary policy committee was stained by negative press that not all lenders would be passing the reduction on to their customers. Chairman of the Treasury select committee John McFall warned banks and building societies that they could face parliamentary intervention if they failed to heed his message.
"This dramatic drop in interest rates should send a red alert to the banks and other financial institutions that they must pass on this cut to customers," he told the Guardian. But by Thursday night, only Abbey and Lloyds TSB had followed this advice. Lloyds TSB became the first lender to respond by cutting the standard variable rate for its Cheltenham & Gloucester (C&G) mortgage customers to five per cent, from 6.5 per cent.
Commenting on the move, Stephen Noakes, C&G marketing director says: "We always try to offer a mortgage range that is priced competitively and reflects the cost of funding." Abbey followed Lloyds TSB's lead after banks were criticised that they had no intention of taking action and it was swiftly joined by HBOS, the Royal Bank of Scotland and Nationwide.
But what about savers?
With Bradford & Bingley and Northern Rock soon joining the other high-street firms, it appeared that the cut was slowly diffusing through the financial system at a benefit to Britons. However, as more interest rates are cut on current savings accounts, people may find themselves out of pocket, under a thinly-veiled disguise of mortgages and savings.
Speaking out about such actions, the Telegraph comments: "The credit crunch has provided something of a bonanza for savers - with rates reaching eight per cent for some accounts - because banks needed to get money from investors in so they could afford to lend it out. The interest rate cut means that this will change fast."
The Telegraph reports that savers surged to transfer their money into high-paying deposit accounts, a deal that many sector commentators claim could be gone within days. A spokesperson for Birmingham Midshires told the newspaper that its 6.6 per cent one-year bond deal may soon have to end because it had been inundated with customers looking to sign up to the account. But with the interest rate cut meaning that savers will be paid less interest, could a fixed-rate account be the way forward?
A banking fix
Customers thinking that they can get around the interest rate cut by putting their money into a fixed-rate savings account may want to tread carefully, after the Times reports that banks and building societies are taking their savings deals off the market in response to the 1.5 per cent interest rate cut. While Bradford & Bingley has withdrawn its fixed-rate bonds - some paying up to six per cent interest - Northern Rock pulled its one, three and five-year fixed-rate cash Isas, which also paid a six per cent rate. Meanwhile, the Daily Express reports that the Anglo-Irish Bank has replaced its 7.05 per cent fixed-rate bond with one that pays out 5.55 per cent - a significant drop.
But there is still hope for UK savers to take advantage of the interest rate cut while they can. The Times lists some of the best fixed-rate current accounts on the market at the moment. "Fixed-rate bonds are a good way to protect your income from falling rates. However, rates are tumbling in the wake of last week's Bank rate cut and advisers say new bonds will be unlikely to top 5.5 per cent," the publication asserts. So the message is move quick to get the best deal. Britons may want to look abroad for high-value savings as the Indian bank ICICI still has a rate of 6.6 per cent, while Netherlands-based AK Bank, partly regulated by the Financial Services Authority, is offering a rate of seven per cent.
Whatever savings route consumers choose, the message is clear: seek advice and act now in order to shore up savings into a well-paying fixed-rate savings account before the banks and building societies withdraw their offers from the market.
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