Bridging

With the Bank of England’s recent interest rate cut, many investors with money in a savings account have unfortunately seen their savings rate cut as well, by more than the .25% interest rate cut. Some of these lenders include Alliance & Leicester, HSBC, Halifax, NatWest, and the Royal Bank of Scotland, among others.

Lisa Taylor, from Moneyfacts.co.uk, said that many savings rates have been cut by more than double the base rate cut. “And with many of the accounts already offering uncompetitive rates, the proportion of the rate shaved off is much higher,” she explained. We only need look to Halifax Liquid Gold for an example, who cut their 1.36% rate by .36%, resulting in depletion of an entire quarter of the rate.

In addition to the recent rate cuts resulting from the Bank of England’s base rate cut, many savers’ introductory rate on a savings account expire without them knowing. Many of these introductory rates are high for a certain length of time, most commonly a year, but then drop to a rate even below the Bank of England’s set rate. When savers are not vigilant about monitoring their accounts, they end up with a poor performing savings account.

Some vigilant savers, however, jump around to different savings accounts, benefiting from their introductory rates and moving on when it’s over. Ms. Taylor, however, explains that this requires a lot of time and effort, and can be avoided by choosing a good, long-term rate. She goes on to explain, “With such a fast changing market, unless you are prepared to move your savings on a very regular basis, a consistently good performing account will offer a good return, without all of the time and effort of constantly searching the market.”

Some however, are calling for more action on behalf of the banks. Nationwide believes banks are taking advantage of their clients’ lack of alertness and are suggesting banks call consumers to inform them that their interest rates have dropped, in the same way that banks contact consumers to inform them that their mortgage payments are due. According to Nationwide, this two-way street is only fair.

Nationwide savings director, Matthew Carter, explained, “The savings market is a highly competitive one and providers are vying to take market share. Some providers seem more interested in boosting profit and achieving best buy status than actually offering long-term good value to their customers.”

What is a saver to do? Besides monitoring your savings account, Ms. Taylor says this is no time for loyalty. According to her company, Moneyfacts.co.uk, the average savings rate is 3.77%, lower than the rate of inflation. Long term, the saver who thinks he is doing well is actually losing money. Ms. Taylor summarizes, “Many of the worst hit accounts are no longer heavily marketed and are probably held by long standing customers who have held the account for many years. It’s just another example of when loyalty does not pay.”

Contrary to what many industry commentators expected, the Bank of England decided not to cut the base interest rate for the month. Ray Boulger, of John Charchol, suggested that may result in increased payments for mortgage holders; he approximates consumers may pay £105 more in interest than they would if the Bank of England had cut the interest rate by .25%.

Mr. Boulger expressed his own surprise at the decision to hold the rate, stating that ‘other negative economic statistics’ led him to expect a cut. One troublesome spot Mr. Boulger highlighted is inflation, pointing to NPower’s 17% price increase. However, Mr. Boulger softens this by pointing out that the consumer price index inflation is only slightly higher than the central 2% target.

In addition to expressing his surprise at the decision not to cut the interest rate, Mr. Boulger explains that if the Monetary Policy Committee goes for too long without cutting the rate, the next rate may have to be greater than had they cut it earlier.