Low Interest Rates Turn Savers into Spenders

MARKET REACTION: What do you think of the interest rate cut? We talk to savers and borrowers to ask whether they will be spending more now rates are even lower

Karen Kwok 5 September, 2016 | 11:08AM
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Since Britain’s vote to leave the European Union, the Bank of England has taken drastic steps to boost the UK economy. Interest rates have been cut for the first time in more than seven years to a new low of 0.25%, prolonging the misery for savers who have suffered from years of low interest rates in the UK.

In reaction, August was the worst month of the year for interest rate cuts with more than 300 savings accounts cutting their rates. Some providers made cuts that were more than five times as much as the 0.25% base rate cut, and 53 of the cuts made were greater than 0.25%, according to the August analysis from comparison site Moneyfacts.co.uk. These reactions sent average savings rates plummeting to new lows, with the majority of average rates paying half what did five years ago.

Rachel Springall, finance expert at Moneyfacts.co.uk said the base rate now sits at its lowest level in more than 300 years and has just given providers another excuse to slash rates.

“Consecutive years of Government lending initiatives mean that the banks lack a desire for savers’ deposits, resulting in an obvious lack of competition in the market,” Springall said.

While the Bank of England revealed it expects inflation to rise to 2.5% by the end of 2017, no standard saving accounts pay more than 2.5%, meaning many savers will be stuck earning a negative rate of return.

More Bad News to Come for Savers

However, the worse is yet to come. Further tightening of monetary policy is widely expected across the market, and Springall warned that savers would be wise to brace themselves for more cuts to come, particularly to best buy deals where providers may struggle to cope with demand.

“It’s clear to see that savers have been left devastated by persistent rate cuts across the market and will struggle to find decent returns for their cash in the immediate future,” Springall said.

Kevin Caley, founder of peer-to-peer lending platform ThinCats said: “Savers now face an impossible task in finding a savings product capable of beating inflation,” Caley added, “I hope Philip Hammond uses November’s Autumn Statement to introduce new measures which support people trying to make their money work harder.”

The Bank of England’s package of monetary stimulus measures might open up the possibility of even cheaper mortgage products for home buyers, but low rates make it doubly difficult for prospective buyers to save up for a mortgage deposit.

We took to the streets of London to ask the public what they thought of the rate cut – and whether it would make them save more, or spend their money instead.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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