How much more pain will savers have to endure?

Just when you thought things couldn’t get any worse for savers, the Bank of England brings up the idea of slashing interest rates to negative territory.

And that’s after almost four years when the UK base rate has been at its lowest ever level of 0.5%.

Savers have struggled to make any return at all on cash and in many cases actually seen the value of their money eroded thanks to inflation, which has remained above the Bank’s 2% target for much of this, hitting a high of 5.2% in September 2011.

The Government’s most recent effort to boost lending – the Funding for Lending Scheme (FLS) – has also hit savers. According to savingschampion.co.uk, providers have announced rate cuts to more than 270 accounts in the first two months of this year.

The impact of the combined policies has hit pensioners and others who rely on their savings for income particularly hard. Taking the central rate lower yet, could only ensure further misery.

[Related feature: Q&A what would happen if interest rates became negative]

“How much more pain will savers have to endure,”asked Anna Bowes, director of savingschampion.co.uk. “A base rate cut, especially one that takes it into the negative, will clearly see more providers cutting the rates on more accounts, leaving savers unable to earn anywhere close to inflation.

“For those who are dependent on their savings to supplement their income, a move like this could be disastrous and leave them unable to recover, even if rates rise again in the future, as they could have to eat into their capital to make ends meet. It could also tempt savers to take greater investment risks in the hope of securing higher income, which could have damaging long term consequences”

Paradoxically, despite the lack of incentives to save, numerous studies show that households are stashing away more and more of their money. Bank of England boss Paul Tucker said negative interest rates could push consumers to start spending their cash, rather than saving it for a rainy day, which would boost the economy.

[Free guide: How to beat falling interest rates]

However, Ben Thompson, managing director of Legal & General Mortgage Club, said: “It does seem a little strange that we are still obsessed with yet more stimulus. We already have record low interest rates for most borrowers and effectively negative interest rates for savers, when accounting for inflation.

“The principle of dis-incentivising the holding of cash with central banks feels interesting however unless there is a cast iron guarantee in place to ensure that any release of funds ends up in the desired places there appears to be little point in pursuing.

“It is clear that things are still a way from normal, more so when the quantum of current stimulus is factored in, however this feels a step too far.”

[Related feature: 2013: The worst ever year for savers]