Misery as savings rates could fall still further
Savers’ misery is not over despite the Bank of England steering clear of negative interest rates, experts have warned.
The Bank of England held rates steady at a historic low of 0.1% on Thursday last week. But Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said despite no change, savers can expect their returns to carry on dwindling.
Ms Coles said the hike in the Bank’s quantitative easing (QE) programme will push bond yields down.
She said this usually means savings rates drift lower, because banks can attract money at lower rates. Ms Coles added savings rates also depend on mortgage demand.
The housing market has recently had a mini-boom as homebuyers take advantage of a temporary stamp duty holiday.
But with England now in a second national lockdown and tough economic conditions ahead this could put the brakes on the housing market and mortgage demand – and feed into savings rates. Ms Coles said: “The Bank of England steered clear of negative interest rates but this doesn’t mean the misery is over for savers. Before the MPC (the Bank’s Monetary Policy Committee) report, all the talk was of the potential for rates to turn negative.”
She said despite rates being held at 0.1%, “this doesn’t mean savers are home free”. Ms Coles said: “Wrapped up in the announcement were signs that savings rates are on their way down. QE was boosted more than expected, which will put more downward pressure on savings rates. Meanwhile, lockdown and economic woes are expected to slow the mortgage market down.
“This means the banks don’t need to raise as much cash from savers so can drop rates again.”
She added: “Rates are already at rock bottom – paying an average of 0.08% on easy access savings and 0.29% on fixed rate and notice accounts. The best rates have fallen away, too, with the best fixed term rates falling last week and the best easy access withdrawn or cut back this week.”
Ms Coles said low rates should not put people off building a savings buffer. “It’s vital we have an emergency savings safety net at times like this,” she said. This doesn’t mean we should settle for a miserable 0.01% from the high street giants, though.
“It’s vital to shop around for a competitive deal because while inflation is likely to be rock bottom for the rest of 2020 it is predicted to rise again from the start of next year.”