As a result of the 2008 financial crisis, central banks and monetary authorities across the world have been cutting interest rates to as low as possible. The aim of this was to encourage and stimulate economic growth but this low interest rate environment has had a knock on effect on regular savings accounts – with Martin Lewis highlighting that this week has been particularly tough.
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Central banks set interest rates for the nation which then affects how regular banks operate. The interest rates set by central banks are known as the official borrowing rate and it influences what borrowers pay out and how much savers can earn.
The central bank for the UK is the Bank of England (BOE) and at the end of January, the BOE voted to hold interest rates at 0.75 percent. This rate was previously raised from 0.5 percent in August 2018 but these are still very low rates overall. For comparison, the BOE interest rate set in November 2006, just before the financial crisis started in 2007, was five percent.
As mentioned, once the BOE set the interest rate for the country high street banks, building societies and other lenders often pass on the associated costs to customers. This results in consumers facing limited options for savings options.
As recent data from the Bank of England highlighted, the average instant access savings account paid just 0.41 percent in interest towards the end of January.
These kind of returns will quickly be outpaced by inflation which, according to the Office of National Statistics, is currently at 1.8 percent. This could be made worse still as the official inflation target set by the BOE is two percent.
The savings market has had a particularly brutal week according to MoneySaving Expert Martin Lewis. As he details, savings are in crisis and he urges people to take action as: “savings’ll become losings”.
Mr Lewis expanded on this, and said: “It’s been the week of 1,000 rate cuts. It seems no one wants to be the best buy. Top deals have toppled like dominoes. I warned here, at the start of the year, that I suspected 2020 would be a savus horribilis, and so it’s proving.
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“All this paints a gloomy picture, with MOST PEOPLE’S SAVINGS EARNING JUST 0.4 percent on average. As inflation is at 1.8 percent, that means most savings are losings – as in real terms your nest egg is shrinking. And while it’s not always possible to beat inflation, the more you earn, the less is eaten away.”
According to analysis from moneysavingexpert.com, the top interest paying accounts have reduced what they offer. The top easy-access accounts came from Marcus and Saga.
Previously, these accounts both paid 1.35 percent but this has now been cut to 1.3 percent.
Reduced rates have been spotted across the board too. NS&I announced that from May it’s Direct Saver account will lower its interest rate from one percent to 0.7 percent.
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Santander will also drop it’s 123 account rate from 1.5 to one percent from May and TSB’s Classic Plus account will half to 1.5 percent.
Even the post office has made cuts to its easy-access and fixed rate accounts.
It may feel that the situation has become relatively hopeless for savers but Mr Lewis detailed there are actions that can be taken to limit the damage.
As he said: “The days of money happily languishing in one account for years are long gone. You need to become an active, aggressive (but polite) saver, monitoring accounts and ditching and switching when rates become pants.”
Martin Lewis explains that no one should have any money in an account paying less than 1.3 percent: “Check now. If you’re earning less, take action.
“I’ve benchmarked this rate, as it’s what the top easy-access accounts pay – which let you add and withdraw money whenever you want. In fact you should store cash here, even while you work out if you can earn more elsewhere.”
On top of this basic rule Mr Lewis provided some tips on what savers can do to get the best result possible.
These tips include locking cash away in fixed accounts if possible as the interest rates here will not change. He also encouraged the use of ISAs, various state benefits for people on low incomes and potential investment options.
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