It is hoped that the recent aggressive rate cuts will act as a stimulus to boost the economy. Millions of homeowners will be better off because their mortgage payments will have decreased and the Government is hoping these people will spend the extra money they now have each month and help kick start the economy. However, the indications are, this strategy may not work.
According to moneysupermarket.com's latest poll 50% of those surveyed stated that they are no better off as a result of the recent rate cuts because they are on a fixed rate mortgage, while 62% of those with variable rate deals said they'll start saving the money instead of spending it.
With the economy in recession and unemployment rising, many consumers are understandably nervous and rather than spending their spare cash, they'd prefer to save it instead. But where can you put your money and earn a decent return?
What's been happening to savings rates?
While the move to cut interest rates to a 300-year low brought cheer for borrowers, the savings landscape is getting increasingly tough.
Several providers moved quickly to pass on the latest full point rate reduction with ICICI slashing its HiSave Savings Account rate from 5.5% to 4.5% and Northern Rock is cutting the rate on its E-Saver from 5.15% to 3.65% on 18th December. Several other providers have also announced rate reductions including Principality Building Society which cut the rate on its E-Saver from 5.35% to 4.51%; Market Harborough Building Society which cut the Onthedot Easy Account from 5.13% to 4.05%; and the Manchester Building Society Premier Guarantee which undertook one of the smaller reductions from 5.51% to 5.26%.
With more savings providers likely to follow suit over the coming days, the few accounts that still offer rates in excess of 5% may quickly disappear.
Our savings section has recently undergone a makeover and now includes a number of new easy-to-use features. These include a savings finder with which you can search for the savings deal that's right for you based on your individual requirements and a savings calculator which compares your account's rate with others on the market.
Save tax-free
If you've not yet used your individual savings account (Isa) allowance this year, consider opening a cash Isa. You can invest up to £3,600 each tax-year and returns are tax-free. This tax-break is always attractive, but with it becoming harder for savers to get a decent return on their money due to falling rates, the boost this gives makes the cash Isa option even more compelling.
Unfortunately, 5%-plus rates for cash Isas have completely disappeared from the current market. However, if you are willing to lock your money away Nationwide offers a two-year fixed rate Isa bond paying 4.00%
If want you want regular access to your cash the Scottish Widows E-Cash Isa offers the best rate of return at 4.60%. Egg is also competitive with its Cash Isa at 4.55%.
Why the race is on to fix
With further Bank rate reductions predicted in the new-year - several analysts are suggesting it may fall below 1% - locking into one of the few attractive fixed rate savings accounts may be a wise move. Bear in mind however, this will mean having no access to your cash for the length of the fixed period.
Providers are pulling fixed rate deals thick and fast. ICICI Bank and Anglo Irish Bank, both of which offered a market-leading one year rate of 5.75% have both slashed their rates. Anglo-Irish's one-year fixed rate bond is now paying 5.0%, while the new rate on ICICI's HiSave fixed rate account is 4.75%.
However, with further interest rate cuts on the cards it could be a good time to fix your savings. Fixed rate bonds don't suit everyone though - you can usually only make one lump sum deposit at the time the account is opened and cannot normally access your money during the fixed rate term. And while fixing now looks an attractive option don't lock your money away for too long. We're obviously in a cycle of falling interest rates at the moment, but rates will more than likely start rising again in the next few years, so the risk of fixing for more than a year or two is that you could find yourself stuck on an uncompetitive rate when the tide turns.
What about easy access?
Once you've used up your Isa allowance, the remainder of your savings could be moved to a variable rate easy access account which allows you to withdraw cash freely (some do carry restrictions) albeit you are at risk if Bank rate falls further.
Most providers have yet to reduce their easy access accounts following this month's rate reduction, so this is something to bear in mind when comparing deals. The leading rate is from Tesco Personal Finance at 6% although this is currently under review so will probably fall in the coming weeks, if not days.
A number of providers have already announced new rates in light of the rate cut. Manchester Building Society's Premier Guarantee Account is paying 5.26% on balances of £1,000 or more. This rate is guaranteed not to fall below 4% until June 1 2009, and it will pay at least 1.5 percentage points more than the Bank of England base rate until June 2010. However, you can only make four penalty-free withdrawals per calendar year.
If you'd prefer a catch-free account that permits unlimited withdrawals Anglo-Irish Bank's Easy Access Account Issue 2 is paying 4.55% on balances of £1 or more, while ICICI's HiSave easy access account has a rate of 4.50%.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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