The Bank of England has kept base rate at 0.5% for nearly four years now, although for many savers that must feel far longer. For much of this post credit crunch, all time low interest rate, phase, most savers have struggled to get a real, that’s to say above inflation, return on their savings. Just when inflation has started to fall and savers have thought they might catch break, what’s happened? Savings interest rates have started to fall even further, causing even more pain for beleaguered savers many of whom are retired, and rely on their savings to help make ends meet.
So just why have savings interest rates fallen so far over the past couple of months?
Well, as with many things when it comes to money, it’s all about supply and demand.
Banks and building societies don’t take our savings in and pay us interest out of the goodness of their hearts. No, they use our savings to lend out to businesses and people who want mortgages. The credit crunch meant that banks other source of money, i.e. themselves, otherwise known as the wholesale funding market, had dried up. Meaning that they had to offer ‘attractive’ rates of interest to savers, to improve their own funding positions and therefore have enough money to lend out to people who wanted to borrow it.
However, that’s all changed. During the course of 2012, one year LIBOR, the interest rate banks pay to each other, has dropped by around 1% and the government has introduced the Funding for Lending Scheme (FLS) as another source of cheap money from the banks.
The effect of lower interest rates and this very generous scheme?
Banks and building societies need less of our savings to finance their lending, which means they can afford to pay even lower interest rates to savers. Even those institutions who are not members of the FLS have reduced their rates, after all, why do they need to pay well above market rates when all their competitors are reducing what they pay?
When will things improve for savers?
Savers expecting an increase in interest rates before the end of the year are likely to be disappointed.
The Bank of England is not going to increase interest rates anytime soon, nervous that any such move would hurt the fragile economic recovery. Furthermore, the FLS, the catalyst for the recent falls, is here to stay, indeed the government hopes more banks will sign up to the scheme. Finally, the LIBOR rate is on a downward curve, and again, like bank base rate, is unlikely to rise significantly in the short term.
The only real hope for savers is that as the New Year starts, banks and building societies who have already hit their savings targets in 2012, increase their savings rates to attract additional deposits as they look to make 2013 as successful as 2012.
Whilst the reasons may be complex, the problems of low interest rates for savers are very real, causing financial hardship, not only for those people trying to save hard, perhaps for a house deposit or on behalf of their children, but also for retirees, who rely on savings interest to help make ends meet.
Highly experienced in all areas of money and finance, Phillip Bray writes for Investment Sense, where savers can find the best savings interest rates.