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Is the Government to blame for falling savings rates?

Rebecca Rutt
by Lovemoney Staff Rebecca Rutt on 16 October 2012  |  Comments 9 comments

Savings rates are plummeting and a new Government scheme could be to blame.

Is the Government to blame for falling savings rates?

The rates on savings accounts have been falling for quite some time now, making it pretty much impossible to get a good return on your cash.

With inflation sailing around the 2.5% mark for a while (though it fell this week to 2.2%) and the base rate at a record low, there aren’t many places where you can find a good savings account.

Add to that, when you do find a decent rate, there’s no guarantee it’ll be around for long as many accounts, particularly those in the instant access market, have steadily cut the interest rate they pay.

Why are rates so low?

Along with the pretty dire state of the economy, high inflation and a low base rate, the Government’s Funding for Lending (FFL) scheme has come under fire as one reason savers are getting such poor returns.

Over the past year the financial crisis and problems in the eurozone have made it hard for banks to access money on open markets. This has led to a tightening in conditions and criteria for banks dishing out loans such as mortgages.

To combat the problem the FFL programme has been designed to provide a much-needed boost by making cheaper loans available to both businesses and individuals.

It’s run by The Bank of England and allows banks to borrow the equivalent of up to 5% of their loan books, and this could rise in the future. Right now 13 companies have signed up, including Barclays, Santander and RBS. When The Bank of England next releases a list of companies at the end of October, it's expected more will have joined.

Plummeting savings rates

As the banks now have the opportunity to borrow at a cheaper rate from the Government, there is less need for them to get their cash from savings customers. And that’s why rates being offered are a lot less competitive now than they were even a few months ago.

Rachel Springall, spokesperson for Moneyfacts, said banks appear to be losing interest in attracting deposits from savers recently, perhaps due to the fact that they can get cheaper funds from the Government via its FFL scheme.

The Bank of England wasn't able to confirm this. Rob Elder, spokesperson for the BoE, told me that by reducing funding costs, the FFL scheme should allow banks to increase lending to UK households and firms. This should boost spending in the economy, and so help to create jobs and raise incomes. 

Financial institutions are also being quiet on the issue and many, such as Nationwide, categorises the FFL as an ‘industry issue’ and therefore doesn't comment on it.

However, Nicola Hussey, spokesperson for Santander, explained that retail deposits still remained key in the bank’s funding and as FFL was only 5% of an institution’s total assets, it hadn’t acted to reduce rates on instant access savings accounts.

“We constantly review our savings range in line with market conditions and competitor movements to ensure we remain competitive," she aded.

How have rates changed?

Instant access account rates have been tumbling for a while and in October the average rate was 1.04% compared to 1.07% in July.

Rates on fixed rate accounts are also creeping downwards and this table demonstrates how much they’ve dropped since July.

Month (2012)*

1-year bond

2-year bond

3-year bond

4-year bond

5-year bond

July

2.70%

3.34%

3.39%

3.73%

3.88%

August

2.77%

3.29%

3.34%

3.69%

3.79%

September

2.64%

3.17%

3.26%

3.64%

3.73%

October

2.357%

3.01%

3.08%

3.33%

3.58%

*source:Moneyfacts

What’s the best rate right now?

If you are hunting for a place for your savings, the market isn’t positive. But there are still good accounts to be found which will pay you more than keeping the money in your current account.

For example, in the instant access market, Nationwide is a decent bet with its MySave Online Plus account paying 2.75% on anything over £1,000, though you can only take one penalty-free withdrawal in the year.

Derbyshire Building Society pays out the same amount and also requires £1,000 but you have total flexibility when it comes to deposits and withdrawals.  If you don’t want this much money in an instant access account, Principality’s offering - which pays a higher rate or 2.85% - can be opened with £1.

More on savings:

Compare savings accounts

The top alternatives to ING/Barclays

M&S Bank offers regular saver account paying 6%

The top fixed rate savings bonds

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Comments (9)

  • Timperly
    Love rating 5
    Timperly said

    By keeping the base rate so low people with mortgages are benefitting at the expense of savers. If savings rates and mortgage rates were allowed to increase, helping savers, then more people would have problems paying mortgages, there would more more forced sales and the banks would have to show their true exposure to the dodgy loans on their balance sheets. Neither the Government nor The Bank of England can allow this to happen. So tough luck on savers.

    Report on 18 October 2012  |  Love thisLove  1 love
  • colinscomps
    Love rating 1
    colinscomps said

    As the Banks are supposed to increase lending to boost the economy, aren't there people on the other size who depend on their savings. Although I cut back when the base rate went down a couple of years ago, due to the recent lower rates on savings I have now cut back on everything that is not necessary to buy, which is probably having the opposite effect of what the government wants me to do, so any high street retailer is not seeing me in their store to purchase items lately unless I need to be and only to purchase what I need, not as before when I used to pick a few other things up as well while I was there.

    Report on 18 October 2012  |  Love thisLove  1 love
  • Perry525
    Love rating 25
    Perry525 said

    By setting the bank rate so low, the government are keeping their borrowing costs down, inflation will make their repayments cheaper over time.

    Report on 18 October 2012  |  Love thisLove  0 loves
  • tuttogallo
    Love rating 74
    tuttogallo said

    Many of our recent problems are caused by banks and institutions lending to one another, creating the insane money-go-round which enabled banks such as Northern Rock to build their castles on sand.

    Banking consists of taking in money from savers and lending it (in a sensible way) to borrowers at a higher interest rate whilst keeping a proportion of that cash as a reserve against a rainy day.

    Everything else that the banks refer to as "banking" is actually high risk gambling with other people's money.

    Report on 18 October 2012  |  Love thisLove  1 love
  • Arblaster
    Love rating 41
    Arblaster said

    Is the Government to blame for falling savings rates?

    Yes and no. Yes, they are operating the mechanism. The interest rates are set by the bond markets. The more people who buy government bonds, the higher the price goes, and the lower the yield goes down as a result. The Bank of England, which is about as independent as Dagenham, print money and buy their own bonds, which forces down the yield. It is called quantitative easing. So, yes, the government are doing this deliberately.

    As to whom to blame. We all let this country get in the state it is in, so we are all to blame.

    Report on 19 October 2012  |  Love thisLove  0 loves
  • oldhenry
    Love rating 265
    oldhenry said

    Who to blame? Well not me as I have never borrowed money for over 20 years and that includes a mortage. I have always lived within my means and paid a lot of tax, at the 40 % rate for many years until retirement.

    Of course the government are suppressing rates to make the government debt cheaper to finance. Businesses are not borrowing because they know the public have no 'spare' money to spend and this will be more obvious as food/energy rack up this winter.

    The economy will contract for years with the spivs in banks trying all sorts of ways to get whatever is left in people's pockets into their bonuses.

    Hype and scam will become normal as business relies on these tactics to maximise their income, so Love Money will be very busy for a long time yet.

    Report on 19 October 2012  |  Love thisLove  0 loves
  • chashley1806
    Love rating 0
    chashley1806 said

    No, Government is not to blame. FEAR is the winner here! As I see it, everyone (from business to consumers) has pulled in their horns by hoarding cash, with the result that the cash is not being spent to keep the economy moving and so interest rates are being kept low in a rather desperate attempt to kick-start the economy.

    The reasons for hoarding cash are many and complex. Over-indebted consumers may be hoarding cash to pay down their debts; companies may be unwilling to spend cash to invest in new products if they perceive that cash-less consumers won't buy them. I agree with Timperly that bank balance sheets are likely to be fragile because there are over-extended consumers paying off mortgages they can barely afford - as an aside, I am very concerned about the interest-only mortgages that homeholders were taking out at the height of the housing bubble, and how these will be re-paid.

    So it is not in the banks' interests to have high interest rates (and thus high savings rates), lest you have many distressed home-owners who cannot afford to keep up their mortgages.

    Report on 23 October 2012  |  Love thisLove  0 loves
  • Getshutofgordon
    Love rating 8
    Getshutofgordon said

    Ironic isn't it, the people that overspent and over borrowed were blamed for the crisis yet now the more sensible and prudent are paying for it to get them off the hook.

    They can blame the bankers but good old Gordon was largely to blame. Why isn't he in the dock for his irresponsible and reckless management of the country.

    Just think if Scotland had been given independence 10 years ago he would have been in the Scottish parliament and would have only wrecked his own country instead of ours as well!

    Report on 24 October 2012  |  Love thisLove  0 loves
  • george19a
    Love rating 28
    george19a said

    YES AND NO

    All the banks are in big trouble - shame. Dodgy loans on non existent developments, PPI repayments, hefty fines for fixing the libor rate, or as in the case of HSBC, for money laundering in the States. The last thing they need is up to 30% of existing home owners with a mortgage handing back their keys because of high interest rates!!!

    For ten years the banks handed out dodgy loans to anyone that could sign their name, including Donald Duck & Mickey Mouse and Joe public resented central government (good old Gordon B) bailing them out with public money. Reducing the income on your savings (good old David C.) is propping up bad mortgages, which in turn is propping up the banks rather than central government bailing them out with your hard earned tax money.

    THE PHRASE HEADS I WIN, TAILS YOU LOSE SPRINGS TO MIND!!!

    Report on 06 November 2012  |  Love thisLove  0 loves

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