Last week’s cut to the Base Rate will hopefully bring relief to the nation’s homeowners – but what about savers? Kate O’Raghallaigh investigates

When interest rates go down, you would typically expect opposing reactions from savers and mortgage borrowers. Mortgage borrowers whose repayments follow the movements of the Bank of England Base Rate could be forgiven for uttering cries of joy, as they will have to pay less each month. On the other hand, if you are on the hunt for a high interest savings account but find yourself in a climate of falling interest rates, you are more likely to find a tougher challenge ahead, as banks will typically drop the amount of interest they pay out.

However, last week’s 0.25% cut to the Base Rate seems to have done relatively little to meet the usual expectations. Mortgage borrowers are currently facing further hikes in product rates as lenders struggle to cope with the financial fall out of the credit crunch. Halifax, for example, has announced its second price rise, having increased the rates on its two-year fixed-rate and tracker mortgages.

The savings market, however, has some remarkably competitive deals, despite the current environment of falling interest rates. Online bank Icesave recently announced it was increasing its fixed-rate savings account to 6.86% while the most competitive accounts from other major providers are currently offering over 6%, in some cases as much as 6.5%.

Commenting on Abbey’s announcement on 11 April that it was increasing its e-saver by 0.25%, Kevin Mountford, head of savings at Moneysupermarket, says: “Savers really are in the enviable position of being able to pick and choose where they stash their cash – amidst all the gloom around mortgages, institutions are still desperately trying to rake in as much as they can in retail deposits.”

How do they do it?

But how can banks afford to keep paying giving savers high interest rates? In terms of keeping its savings rates so competitive, Mark Sismey-Durrant, managing director of Icesave says that being an online bank helps them enormously. He says: “As an online bank, we have significant efficiency gains compared to other providers; it is a lower cost operation.”

It also depends on the way a bank determines its product rates – using the London Inter Bank Offered Rate (LIBOR) or Base Rate – adds Sismey Durrant. LIBOR is the interest rate at which banks loan money to each other, while the Base Rate is decided by the Bank of England’s Monetary Policy Committee each month. He continues: “For those banks that are lending against LIBOR, the Base Rate cuts aren’t as directly relevant and so they can afford to keep savings rates where they are, at least for now.”

Not every institution reacts to interest rate decisions immediately either, says Rachel Thrussell, head of savings at price comparison site Moneyfacts. She says: “When the Bank of England makes a cut, institutions don’t react immediately as they need time to process what they’re going to do. This is especially the case with building societies, which have to have decisions approved by their board before any changes come into force. The beginning of next month will most likely bring about some cuts to savings accounts that are based on the most recent Base Rate cut, in particular those with building societies.”

Paul Whitlock, head of savings at Bradford & Bingley, says that the increase in savings rates is being driven by an increase in demand: “The renewed focus on savings balances that the credit crunch has brought about is clearly good news for savers. New entrants to the market, especially those from outside the UK, continue to force savings rates ever higher and so we are likely to see healthy competition for the foreseeable future. At some point though, savings providers will have to look to make rates more sustainable so customers should take advantage of the high rates currently available in the market while they can.”

Stick or twist?

So what should savers do – is now a good time to snap up a bargain, or are some rates likely to start consistently dropping? “If you’re not in a hurry to switch your account, we would say wait until the dust has settled before you make a decision,” continues Thrussell. “The rates are quite high at the moment, but we can’t see them going any higher.”

Although savings rates are high at the moment, as ever, there are few, if no guarantees when it comes to interest rates. If you find an account with a whopping headline rate, make sure you check the terms and conditions beforehand, so you don’t get caught out.