Interest cut bad news for savers
Updated on 06 November 2008
The interest rate cut is bad news for savers who are already seeing the real value of their money eroded by inflation.
Banks and building societies are likely to be slow to announce whether they will be passing on the 1.5% cut in interest rates to their borrowers, but they are expected to be quicker in slashing their rates for savers.
Returns on savings accounts have been at seven-year highs for much of this year, as lenders have become increasingly reliant on consumer deposits to fund their mortgage book.
But with interest rates falling by 2% in two months, commentators are predicting sharp falls on deposit account rates, and current best buy deals of more than 6.5% on savings accounts and 7% on bonds are likely to be short lived.
Moneyfacts.co.uk said it had already seen an "influx" of savings providers pulling their fixed rate bonds following the Monetary Policy Committee's announcement.
Michelle Slade, of Moneyfacts, said: "We are expecting savings rates to fall. A number of people have already pulled their fixed rate bonds.
"We expect people to cut rates, but a lot should stave off cutting them by the full 1.5% as they still want the custom because they are still struggling to get funding for mortgages."
Andrew Hagger, of Moneynet.co.uk, said basic rate taxpayers would be an average of £12 a year worse off for each £1,000 they had saved, if returns are reduced by the full 1.5%.
Consumers are already suffering from the current high rate of inflation, which eats into the real value of their savings.
With the latest figures showing inflation running at 5.2%, a basic rate taxpayer needs to earn interest of at least 6.5% on their money, while a higher rate one needs one of 8.63% to get a real return on their cash.
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