The Bank of England announced that the base rate has been held at 5.25%. Moneysupermarket.com expert Kevin Mountford discusses how this will affect savers with site editor Clare Francis...
Video Transcript
Clare Francis: The Bank of England voted to keep interest rates on hold at 5.25% this month, a decision which had been widely expected. All but one of 65 economists polled by Reuters said they thought interest rates would be left unchanged.
While evidence continues to point towards a slowing economy and housing market, factors which would normally suggest interest cuts may be needed, inflationary pressures persist. Over the last few weeks we've seen oil and wheat prices hit record highs, which means that food, petrol and energy bills could climb further. The Bank of England therefore faces a tough balancing act as it strives to fend off recession on the one hand, while keeping inflation in check on the other.
The decision to keep interest rates on hold this month will be welcomed by the nation's savers who have already seen rates fall twice in recent months - once in December and again last month in February. And many institutions have taken that opportunity to widen their margins so some savings rates have been cut by more than the interest-rate reduction.
Whilst Bank rate - the country's official rate of interest - has fallen by 0.5 percentage points, some savings rates have been cut by a lot more. Kevin Mountford, head of savings at moneysupermarket.com is here to explain what's going on and tell you where you can find the best deals.
Q1 - So Kevin, what have banks and building societies been doing?
Kevin Mountford: I think in the main Clare the banks and building societies fall into three categories.
You've got the traditional banks, those that have got quite an extensive portfolio of savings products, and they typically will look to exploit the margin by passing on rate changes to their 'back book' - to their older products - but they are very conscious that they still need to acquire new customers, so they'll tend to run with a flagship product. So, they're the big four or five banks that you would expect.
You've then got the UK based, more tactical providers, and often this is some of the smaller banks or certainly the building societies, and they still have inflow requirements in terms of retail savings deposits. But, they're not as extensive, so they will come out with attractive products, but you will find that they're not on the market for very long.
And then of recent we've seen a lot of overseas banks coming into the UK. Now, by virtue of the fact that they haven't got a strong brand, they have to come in with a strong price proposition. But often they work on a low cost base, so that enables them to offer very attractive headline rates to savings customers.
Q2 - Because even though interest rates have been falling there are still some great savings rates available, aren't there? Much higher than they were last time Bank rate was at 5.25 %?
Kevin Mountford: Yes, I think if you look at this time last year, when as you say the base rate was about the same, the interest rates on average are a lot higher and I think this is a consequence of 'post-Northern Rock'. The banks are unable or unwilling to conduct business between themselves - they're very reliant on customers to deposit money, and as such there is a desire to continually attract retail deposits.
Q3 - And what are the best rates available?
Kevin Mountford: Well I think you've got different types of product categories - you've got two clear camps. One is the easy access market, and the other the fixed rate products.
[With] the fixed rate products, the beauty of that by definition is that if you invest now then they're not going to change, and there's a number still paying 6%, 6.5% and above, if you look closely enough.
I think as far as the easy access - which accounts for over 50% of savings products anyway - there's still 6.5% available, so if you think of the gap between that and current bank base rate at 5.25%, it does seem to be quite an attractive offer.
Q4 - So for those people who have been hit by their bank slashing their savings rates by more than the interest rate reduction, there's loads of places to move to?
Kevin Mountford: Yes there is, and I think this is where people who've tended to be a little more, I guess lethargic, in terms of when it comes to changing rates, they really need to have a look and make sure if their getting value for money. I mean, headline rate isn't actually everything, but it is an important consideration.
Q5 - I was going to say, are there any catches? Is there anything (if you are going to look for a new savings account) is there anything you need to watch out for?
Kevin Mountford: Yes, there are. I mean, going back to my earlier point that you've got different types of providers, that by and large are trying to compete in a price proposition environment, so 'Rate is King' still.
So what they try and do is manipulate some of that and balance it with their margin, by introducing different features, or maybe slightly more onerous terms and conditions.
A perfect example of this is that you'll maybe get a short term bonus that makes the product seem artificially attractive, but I think the ones that create more concern is where you've got withdrawal penalties. So, if it's an easy access product, by definition that would suggest you can get at your money as and when you require. But some of them, including the Alliance and Leicester product (which leads the way at 6.5 percent at the moment) you do get penalised if you take your money out.
So you need to go into this with your eyes very wide open, and if you're likely to want to access the money, then maybe look at something off the pace in terms of 'best buy' but it doesn't carry these sorts of penalties.
Q6 - So what are the best deals if you're looking for a catch-free easy access account?
Kevin Mountford: I guess there's three that stand out in the market at the moment. You've got the Icelandic bank, Kaupthing Edge, they're got an offer of 6.5%, and they've declared the fact that they're not going to charge that rate post the last base rate reduction. You've then got the Indian operator, ICICI. They've just announced a reduction, but even after that they are paying 6.1%. However, if you're looking for a more established brand, then Bradford and Bingley is 6.15% at the moment, and none of those three products have any bonuses and they don't have any withdrawal penalties.
Q7 - So all really good deals given that interest rate (bank rate) is at 5.25%?
Kevin Mountford: They are, so there's no excuse not to switch your account.
Clare Francis: Brilliant, thanks very much Kevin.
With household bills on the up, it really is important to ensure you are maximising the returns you're getting on your savings. While savers were given a reprieve this month, many economists do expect interest rates to fall further this year. So if you've got money in an account that's no longer competitive, or if your provider has recently cut your savings rate by more than the reduction in Bank rate, then it's time to vote with your feet and move your money elsewhere.
