The years following the financial crisis have not been kind to savers. Interest rates have fallen to levels not seen for centuries and inflation has remained relatively high. To make matters worse last August saw the launch of the Funding for Lending scheme, which pushed interest rates even lower.
The interest rate reductions have been stark. Just a year ago the average one year fixed rate bond paid an interest rate of 2.70%, whilst two year fixed rate bonds averaged higher at 3.34%. 12 months later, these average rates have dropped to 1.62% and 1.84% respectively, a huge fall at a time of relatively high inflation and significantly eroding the real value of savings.
Indeed, it is now impossible for tax-payers to get a real, above inflation, return on their savings. Savers using a Cash ISA (Individual Savings Account) fair little better, with only one option, from First Direct, offering the prospect of a real return.
Despite recent rises in gilt yields and money market rates, interest rates for savers have remained stubbornly unmoved, with the Funding for Lending scheme exerting further downward pressure.
Good news for savers?
However, news from the one of the country’s largest banks and one of the smallest building societies, might give a glimmer of home to beleaguered savers.
The Halifax is set to launch a series of fixed rate accounts, paying a gross interest rate of 2.1% over two years, 2.25% over three years, 2.30% over four years and 2.35% for five years.
Whilst the rates are not good enough to make it onto the best buy savings tables and far better rates are to be had elsewhere, the launch of these accounts is significant, as they represent a rise of up to 0.45% on previous rates offered by the bank.
The Halifax is not alone.
The Kent Reliance Building Society is also set to increase rates later this week, with rates on their one year fixed rate bond and two year fixed rate bond increasing from 1.80% to 2.05% and 2.35% respectively.
A word of caution
A word of caution though, from non-other than the Bank of England.
Along with last week’s decision to leave interest rates unchanged the Bank also released a statement, designed to damped expectations of an imminent rise in interest rates.
The statement read: “At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.” (Source: Bank of England)
Interest rates on SIPP deposit accounts slashed
There is also bad news for SIPP deposit account investors, as the Leeds Building Society have announced they are reducing the rate of interest on their popular instant access account from 1.60% to 1.00% and on their one year fixed rate account from 1.65% to 1.15%.
The move comes just days after Investec dramatically cut the interest rate on all their fixed rate accounts for pensions.
Whilst other SIPP deposit account rates have remained broadly unchanged, there has to be a possibility other banks and building societies will follow the lead of the Leeds Building Society and Investec and reduce their rates.
Where now for savings interest rates?
That is indeed the $64,000 question, we asked Simon Rose of Save our Savers , for his view: “It is quite clear that under the new Governor of the Bank of England, financial repression is going to continue, with interest rates kept low and the pound under pressure. We have already reached the stage where a small rise in interest rates will cause untold pain and damage. But the longer rates are depressed, the more the economy will be distorted and becalmed and the more zombie-like it will become. Difficult though it will be, our only chance of achieving sustainable growth, rather than debt-fuelled temporary consumption-led spending, will be through returning to more normal conditions. Clearly, Mark Carney and the Chancellor are not yet willing to face up to what has to be done, preferring more pain relief than actually treating the patient.”
Only time will tell whether these interest rate rises from the Halifax and Kent Reliance will be matched by other banks and building societies, or the downward pressure on interest rates caused by the Funding for Lending scheme will remain the dominant force in the savings market for the next few months.
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