Why are interest rates on savings accounts falling so quickly?

03/12/12
Investments

Why are interest rates on savings accounts falling so quickyThe Bank of England announced on 8 November that base rate would remain unchanged at 0.50%, a level that has prevailed since March 2009.

What can appear at odds with this decision is that savings interest rates and particularly those on offer to new savers have recently been dropping like the proverbial stone.

Why is this so?

We asked, Gev Lynott, Chief Executive of The Mansfield Building Society to provide some insight about current interest rates and what impact this might have on the SIPP market over the coming months.

Economic uncertainty

Gev says “There are a number of reasons why this is happening.  Continuing uncertainty about the overall state of the economy and the outlook for future growth is one of them; the minutes from the October meeting of the Monetary Policy Committee confirm that there was a difference of opinion amongst Committee members about the financial outlook and the action that needed to be taken.”

Gev Lynott, Chief Executive and Director at Mansfield Building Society

Gev Lynott Chief Executive and Director at Mansfield Building Society

Visit the Mansfield Building Society website by clicking here or call 01623 676300

This uncertainty is shared by just about everyone involved in the finance industry, because no-one really knows what is going to happen over the next few years.  The medium and long term impact of Quantitative Easing (QE) is complete guesswork, so it’s hardly surprising that savings providers are thinking twice about offering fixed rates that could soon be out of kilter with the market”.

Funding for Lending Scheme is reducing savings interest rates

Gev is also convinced that the Funding for Lending Scheme, launched by the Bank of England and HM Treasury in July 2012, is also having an unwelcome and unforeseen affect on savings rates.

He explains “Economic uncertainty is only one of the reasons why savings rates are currently lower than those that were available say 12 months ago.  Another reason is the fact that an increasing number of banks and building societies are gaining access to the Bank of England’s Funding for Lending Scheme which allows those participating to access funds at comparatively cheap rates.”

Gev continues: “The Funding for Lending Scheme is undoubtedly well intentioned because most would agree that the housing market requires a much needed boost.  The fact that this cheaper funding is mostly benefiting borrowers requiring a relatively small mortgage, or remortgage, is another matter entirely and not one that The Mansfield necessarily agrees with, but the availability of this cheap money means that banks and building societies are not having to work as hard to attract money from traditional savers and other sources e.g. SIPPs, to fund their new lending, hence the lower rates.  Official statistics about the Funding for Lending Scheme have yet to be published but anecdotal evidence suggests that the amount of money involved is having an adverse and unintentional impact on savings rates, including those for SIPP deposit accounts.”

Concluding, Gev says: “In these times of austerity and what appears to be a never ending regime of low savings rates, it is ever more important to make savings work harder, with a savings provider that offers good products, service and rates over the longer term.  SIPP deposit rates vary dramatically so shopping around is called for to obtain better rates.  For instance some regional building societies including The Mansfield are currently offering rates that are more than double the lowest SIPP rates.  Full SIPP details of The Mansfield Building Society’s SIPP account can be viewed in the “savings” section of our website at www.mansfieldbs.co.uk