30 June 2014

Cash interest rates – why are they still falling?


NatWest and Royal Bank of Scotland recently reduced interest rates on their instant access Cash ISAs.  With effect from 1st August 2014 balances of less than £24,999 will earn just 0.75% interest, down from the current rate of 1%. For those with balances of £25,000 and over, a rate of 1% will apply, also 0.5% down on the current rate.

This follows several other providers reducing interest rates over recent months resulting in the average instant access savings account now paying 0.5% p.a. (source: Moneyfacts), in comparison to 3.3% six years ago.

So, why have rates fallen over recent years?  The most obvious factor is that they are reflective of the Bank of England base rate, which has remained at 0.5% since March 2009. Other factors include the Bank of England’s quantitative easing programme (which introduced £375bn into the economy) and the Funding for Lending Scheme, launched on 13th July 2012, and designed to incentivise banks and building societies to boost their lending to the UK real economy. These factors have reduced the need for banks and building societies to borrow money from savers.

Recent commentary has suggested that the economy is sufficiently recovered to make a Base Rate increase a possibility.  Many experts are forecasting an increase of 0.25% before the end of 2014.  However, and increases are likely to be nominal, and the rates seen before the global financial crisis of 2008 and 2009 are unlikely to be repeated in the foreseeable future.

When the Base Rate does eventually rise, there is little real prospect that this will make any significant difference to savers. Financial institutes remain generally reluctant to lend, so simply have no motivation to attract deposits. The rate cuts recently announced come just as the annual ISA allowance is about to rise from £11,880 to £15,000, on 1st July 2014. The message to savers from the banks and financial institutes is therefore quite clear – they do not want or need our money.