Will new government stimulus bin savings rates?

While people in search of mortgages and business loans may benefit from a Government stimulus package of £140 billion in ultra-low cost loans to be made available to banks, some feel the new infusion of capital will bin savings rates as cut-rate loans flood the market.

Experts say that lenders will have little incentive to offer competitive rates to savers in order to generate working capital if they can simply access less expensive loans for their own use. What could soon be the beginning of an inevitable avalanche of dropping rates may already be occurring right now, as the metric that controls how banks and building societies set their prices on fixed rate bonds – five-year and one-year swap rates – dropped by a considerable margin.

Truth be told, savings rates in the UK are already circling the drain in comparison to pre-credit crunch levels. Savers need to jump if they spy a best buy, as lucrative deals are pulled due to over-subscription constantly. Other challenges to finding top-paying accounts is the ubiquitous bonus rate, which usually drops off a high-paying savings product after a year only to leave a standard rate of 1 per cent or less – which means that savers will be nearly constantly switching banking providers if they want to maximise their savings.

The average interest rate in the UK now stands at around 1.3 per cent. With the amount of cash savers have in deposit accounts – estimated at around £1.1 trillion – every reduction to the average rate of 0.1 percentage points would drop the incomes of savers by a collective £1.1 billion on an annual basis.

Save our Savers spokesman, Simon Read, says that it is inevitable that banks will abandon their savers as soon as they can once the Government makes inexpensive lending available to them. Financial service providers have only one concern – their own profits – and have no concern for what is best for the nation’s overall economic health, Mr Read said, adding that banks will drop savings rates overnight if the Bank of England moves forward with supplying cut-rate finance.

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