Savers face more misery as interest rate cut looms

Long-suffering savers are braced for a further hit to their nest eggs as pressure mounts on the Bank of England to cut interest rates.

Rates have been at or close to record lows since the financial crisis more than a decade ago, and now stand at 0.75 per cent.

While ultra-low rates have been a boon for borrowers, slashing the cost of mortgages in particular, they have resulted in dismal returns for prudent savers. 

And according to financial markets, there is now a 62 per cent chance that the Bank will cut rates again at the end of this month to 0.5 per cent.

That would spell further misery for savers at a time when the average easy access account pays interest of just 0.59 per cent – well below inflation. 

Official figures yesterday showed inflation fell to a three-year low of 1.3 per cent in December – well below the Bank’s 2 per cent target – fuelling talk of a rate cut to kick-start the economy.

Ruth Gregory, senior UK economist at Capital Economics, said: ‘The figures might be enough to tip the balance towards an imminent rate cut.’ 

Rachel Springall, a finance expert at Moneyfacts, added: ‘It’s been a terrible decade for savers and murmurings of a rate cut will feel like a further blow.’

Some experts believe the Bank should hold fire, amid signs that the economy has perked up since the general election last month when Boris Johnson won a convincing majority.

Governor Mark Carney last week revealed there had been a debate at the Bank over the ‘relative merits’ of cutting rates in the coming weeks. 

The Canadian, who leaves the Bank in March after seven years in charge, said ‘a relatively prompt response’ could be needed if economic weakness persists.

Other members of the Monetary Policy Committee – which sets rates – have also hinted that they are ready to act.

Speaking in Northern Ireland, MPC member Michael Saunders, who has been arguing for a rate cut since November, said: ‘The economy still has a slow puncture. Even if the economy improves slightly, risks for the next year or two are on the side of a more protracted period of sluggish growth.’

He said in order to return inflation to 2 per cent, further rate cuts may be required, adding he favours a ‘prompt and aggressive response’ to the current situation.

Daniela Russell, head of UK rates strategy at HSBC, said: ‘We still think a rate cut in May is most likely in terms of timing, but the risk of an earlier move is rising.’

More than a decade of low interest rates has left borrowers with some of the cheapest mortgages on record. 

The average five-year fixed-rate mortgage has fallen to a record low of 2.73 per cent while the average two-year fixed-rate mortgage is 2.43 per cent, just above the record low seen in October 2017 of 2.2 per cent. 

But it has also hammered savers, with Santander this week announcing the rate on its popular 123 account will be cut from 1.5 per cent to 1 per cent in May. When it launched in 2012, it lured in customers by paying 3 per cent.

Springall added: ‘Inflation may have fallen this month, but for some it continues to eat its way into the real return of cash savings rates, so savers are losing money in real terms.’