Fears have been raised that banks and building societies were preparing to cut rates for savers by more than last week’s reduction to 0.25% by the Bank of England, after First Direct became one of the first major firms to take the axe to savings rates.
Threadneedle Street’s move on Thursday to cut interest rates to a new historic low has forced all lenders and saving institutions to embark on urgent product reviews.
While most were quick to pass on the cut to borrowers, reviews of savings rates are taking longer. First Direct wrote to its customers at the weekend telling them that their savings would be hit by a cut to rates greater than the quarter point cut announced by the Bank of England.
Susan Hannums, director of Savingschampion.co.uk, said the cut was adding insult to injury for savers. “Although one of the first to announce their plans for savers, First Direct won’t be the only provider to take full advantage of this base rate decision to cut rates,” she said.
“Our concern is they will be setting the tone for other providers to follow. All eyes will be on what the providers are doing and the worse it is, the easier it will be for others to follow suit.”
Financial firms are weighing up the impact of the Bank’s rate cut on their profitability, although the governor, Mark Carney, told them last week they had no excuses not to pass on the cut to borrowers. He created a £100bn funding scheme for banks to try to cushion the blow on profits, which are determined by the difference between what banks pay to savers and are able to charge out to borrowers.
Lloyds Banking Group, 9% owned by taxpayers, is the last major lender not to announce plans to cut its standard variable mortgage rate following Carney’s remarks. Lloyds, the biggest mortgage lender and savings institution, said it is also still reviewing its savings rates.
The former pensions minister Ros Altmann said policymakers risked being “unfair” on savers. “Giving banks another excuse to cut savings rates is unlikely to really help the economy but it will certainly hurt prudent savers,” she said.
“Ordinary people who need to save for a rainy day or even for their retirement – and those older people who have saved for years in order to enjoy a better later life – have lost out significantly and many of them are more likely to reduce their spending than increase it as a result of receiving lower interest rates. That surely runs counter to the intentions of the policy.”
First Direct, owned by HSBC, is cutting the rate on its cash Isa from 1.3% to 0.9%, while the rate on its bonus savings account will be chopped from 0.75% to 0.4%. A range of other accounts will be subject to a 0.25 percentage point cut. HSBC said it had cut rates on a number of its accounts, but none by more than the base rate reduction.
In an email to customers, First Direct said its rates would remain competitive: “We know this isn’t great news for savers, but even though our savings rates are not directly linked to the base rate, we’ve taken this time to review our savings accounts.”
Some smaller providers have also made deep cuts. Marsden building society has reduced interest on its easy access branch saver from 0.7% to 0.4%, while its easy access direct saver is to fall from 0.65% to 0.25%, according to the data provider Moneyfacts.
A number of other providers have pulled accounts for new customers and relaunched them with lower rates, Moneyfacts says. Charter Savings bank has dropped rates on its 30-, 60- and 95-day notice accounts by 0.25 percentage points. Skipton building society’s five-year fixed-rate bond now offers 1.5%, down from 2.01% before Thursday.
Savers had long been suffering from low returns, and expectations that the Bank would reduce the base rate led to the withdrawal of many best buy accounts ahead of Thursday’s decision. Royal Bank of Scotland and its NatWest subsidiary had even written to business customers warning that it could one day start to charge for deposits.
Hannums said: “It is, however, always disappointing when providers use the excuse to cut rates by more than the change in the base rate, especially when rates are already so low.” She added: “Although First Direct would argue that not all their accounts are being cut by more or even the full 0.25%, this will be little solace to savers such as those holding its cash Isa.”
First Direct said the changes had been made “in light of recent market activity”. “We continue to provide a wide range of products with competitive rates to suit the different needs of different types of savers including the Regular Saver at 6%.”
Some firms have pledged not to hit savers by more than the quarter point cut, including Santander and Nationwide building society.
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