Is the Government to blame for falling savings rates?

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

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

2357%

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.

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