Will interest rates on savings accounts ever go up?

Will interest rates on savings accounts ever go up?Savers across the UK are all struggling with ultra-low interest rates – some of which are well below the rate of inflation – is there any relief in sight?

It’s a tough time for anyone with a personal or business bank account in the UK. In fact, it’s not exactly easy for anyone who wants to conduct any sort of financial business, whether it be taking out mortgages, high interest savings accounts, or business loans, as the interest rates on all these financial products are currently abysmal – but none are more terrible than savings products, as the majority of savers in the UK can’t even break even after inflation and taxes are taken into account.

Now for the low, low price of negative return on investment

There’s a serious problem in the savings sector, as overall interest rates have plummeted to levels that mean your money will actually be worth less in a year than it’s worth now. Unless you’ve got a tax-free ISA, you’re going to lose at least 20 per cent of any returns on deposits you make this year as the taxman takes its cut – to say nothing of what higher-rate taxpayers will end up losing – and with the Consumer Prices Index currently at 2.5 per cent, you need to earn at least that much of a return to break even on your savings deposits.

This has led to many Brits feeling that any sorts of savings activity would be utterly useless in the current economy. Instead, most UK households have turned to paying down debt levels – at least, those households that have not suffered from wage freezes and jobs loses – and are simply keeping their heads down and soldiering on, hoping that interest rates will rise high enough once more to make opening savings accounts worthwhile, but there’s little idea when the situation will actually improve.

What’s keeping interest rates down?

If you’re looking for someone or something to blame for abysmal interest rates, it’s easy to point the finger at banks and building societies, and truth be told there’s a good bit of validity in leveling the blame on the nation’s financial service companies. However, the Bank of England has played and continues to play a major role in the consistently low interest rates offered to savers across the UK.

More than three years ago, the Bank’s Monetary Policy Committee dropped the base rate, which is the rate that all financial service providers must use to base all their financial products upon, to a record low of 0.5 per cent in an attempt to stimulate economic growth by dropping the cost of business loans and mortgages. However, this left savers high and dry, as banks that no longer had a requirement to offer high interest rates on savings accounts scaled back their offerings considerably.

Meanwhile, the MPC’s attempts to stimulate the economy may have backfired, as banks and building societies have been reluctant to agree to lending for businesses or prospective home buyers, despite several Government schemes to the contrary such as last year’s Project Merlin. This year, the Treasury has tried again with the new Funding for Lending scheme, which offers low-cost wholesale funds to banks and building societies in return for a promise from lenders to actually lend, which could result in the economy once more beginning to grow – and could lead to the base rate being increased by the MPC.

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Image: Piggy Bank by Ben Dodson