A scheme launched earlier this year by the government to boost lending by banks may be having a negative effect on savings rates. The Funding for Lending scheme, created to stimulate lending to small and medium-sized businesses is seen as part of the reason why a growing number of banks and building societies have chosen to reduce the annual interest rates they pay for savings accounts.
Average returns on savings accounts have fallen by around 10% in the past couple of months, something that many savers and consumer groups are concerned about. During that period, the average rate for a one-year fixed rate savings account has dropped from 2.77% to just 2.57%, while two-year accounts have seen their rates fall to just 3.01% from 3.29%. Recently, a handful of savings account providers have reduced their rates in accordance with the current trend.
The fact that banks can now access new money from the Funding for Lending scheme is seen as the main reason why savings account holders can expect lower rates than usual. With more money from the government behind them, the need to offer attractive savings account deals is reduced. Will Becker from comparison site Totally money explained how savers are being hit in the pocket:
“Unfortunately, this already long period of falling output followed by stagnant or low growth means savers are really suffering. However, we certainly wouldn’t want the Bank of England to stray from its low interest rate path. Inflation (which would hit savers even harder) seems to have been checked and with mortgage affordability finely balanced, a significant rise in interest rates would almost certainly affect the entire economy, savers included, very negatively.
We suggest savers who are impatient to see better returns might be interested to look at the potential rates of return available from alternatives to deposit accounts including the very interesting peer to peer sector where lenders such as Zopa and Ratesetter [link to savings tables] offer the ability to lend direct to borrowers.”