The current environment of static interest rates in the UK has created problems for personal and business bank account providers, experts say.
Even though the Bank of England’s base rate hasn’t budged from its 0.5 per cent level since March of 2009, the government’s savings account arm, National Savings & Investments, recently dropped its Direct Saver interest rate by 0.25 percentage points to 1.5 per cent. So why drop rates, consumers ask? And does this mean that more savings products are soon to drop as well?
Changes to the base rate provide retail banking institutions perfect opportunities to manage their rates. This is accomplished by, when rates are falling, to reduce their rates of return more than the base rate cut, or by not passing on the full measure of rate increases to all their savings products.
However, with the base rate stagnant at 0.5 per cent for so long, this has posed a problem to banking institutions, as the best buy deals are offering rates of return that are so far over the base rate as to boggle the mind. The disparity between the base rate and retail banking rates can be traced back to the dog days of the credit crunch, as wholesale money markets became unsuitable for funding mortgages, instead turning to consumers to drive inflows, necessitating high rates of return to remain competitive.
Unfortunately, as the financial crisis in the eurozone persists, these conditions are still in existence today, with the Bank of England keeping the base rate at its historic low in order to encourage economic growth. Moreover, many economic experts state that it may not be until 2016 before the Bank raises the rate once more.