'Bank of England policy is transferring wealth from savers to fund the banks': How cheap money continues to erode savings rates

Savings struggle: Rates continue to plummet - and show no signs of slowing

Savers are losing more than £17billion a year as inflation continues to wipe out the low interest earned by their savings and current accounts, according to research.
A combination of paltry rates and inflation of 2.7 per cent in May means savers' pots are swiftly declining in value, according to UHY Hacker Young.
The accountancy group says £114billion is currently deposited in accounts yielding no interest at all – and higher interest savings accounts now offer rates far lower than inflation.
A typical tax-free cash Isa rate, for example, sits at just 1.7 per cent. Any money deposited into accounts offering interest rates below inflation will decline in value on a monthly basis.
Savers have now had to deal with over four years of tumbling rates – and the situation seems unlikely to improve in the near future.
Just yesterday Britain’s biggest building society, Nationwide, cut rates on a range of its savings products.
A major factor in the last 12 months for plunging rates is the Government’s Funding for Lending scheme, which is eroding the value of savings.

 

Banks are being offered cheap money by the Government under the scheme, so there is less incentive to offer high interest rates to attract deposits. And it has recently committed to continue the scheme.

UHY Hacker Young says before the Funding for Lending scheme was introduced, banks kept interest rates attractive to reel in savers.
But now the major high street banks no longer need to attract such deposits, and most of the banks have fallen out of the This is Money best buy savings tables altogether.
Mark Giddens, head of private client services at UHY Hacker Young, says: ‘Inflation is above target and the Bank of England is predicting further rises this year, and since interest rates remain very low, savers are suffering. You could be forgiven for summing up Bank of England policy as transferring wealth from savers in order to fund the banks.

‘The Government’s extension of Funding for Lending is bad news for savers because it could keep interest rates for bank accounts low.
'It is especially bad news for those savers such as the elderly, who need to draw on their savings in the short-term and so cannot afford to lock their money away in longer-term or higher risk investment products. They have no alternative but to sit and watch their savings melt away.'
UHY Hacker Young adds that the Bank of England’s Quantitative Easing programme has also played a significant part in the erosion of the value of savings, as it has ensured that the rate at which banks pay interest in order to attract deposits has remained exceptionally low. 

 WHAT NEXT?

- What next for interest rates?
- What next for savings rates?

...AND BANK DEPUTY GOVERNOR WARNS OF RISKS OF ANOTHER ECONOMY-BOOSTING SCHEME

The Bank of England’s deputy governor today warned about the dangerous risks of another government scheme to kick start the economy – Help to Buy.

The scheme could cause another financial crisis if used as more than just a short-term measure, Paul Tucker warned.

The scheme will guarantee home loans from January – shifting the risk of borrower default from lenders on to the state.
Loans up to the value of 15 per cent of the purchase price of any property will be guaranteed, up to the value of £600,000.
It is designed to get the property market moving again by helping people without huge deposits to get on to the property ladder.

But Paul Tucker told MPs a medium or long-term mortgage guarantee could inflate another property bubble.
‘This country has had an active housing market without a government subsidy. I'm absolutely sure that that structure helped brew the bubble that blew up the world in 2007 and 2008. This is not a market that needs a permanent subsidy.’