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Lack of competition pushes savings rates lower

Lack of competition pushes savings rates lower

Category: Savings

Updated: 24/08/2016
First Published: 24/08/2016

There's no end in sight to the downward spiral of savings rates – if anything, it only seems to be ramping up. Indeed, our latest figures show that the majority of savings rates have fallen further this month to result in most reaching fresh lows once again, as providers continue to withdraw products and cut rates amid ever-weakening competition.

Record reductions…

The fixed sector of the market bore the brunt of the rate cuts for a further month, with the average one-year rate down by 0.06% (to 1.12%) and the long-term equivalent down by 0.04% to 1.56%. It's a similar story in the ISA sector, with the average one-year ISA rate down by 0.05% to 1.09%, while the long-term rate fell by a lesser 0.01% to 1.38%.

All fixed rates are now at the lowest levels ever recorded, and the same can be said for the variable ISA sector: both the no notice and notice ISA rates fell by 0.03% to stand at record lows of 0.95% and 1.04% respectively. In the non-ISA sector the average no notice rate is also at a fresh low of 0.54% after posting a fall of 0.02%, with only the notice rate remaining above record low levels. It's also the only rate to remain unchanged on a monthly basis, and therefore continues to stand at 0.79%.

… and fewer products

Unfortunately, it isn't only in terms of rates where the savings market is suffering. As well as dramatic cuts, our figures also point to a notable reduction in availability, with the number of savings accounts available posting a sharp drop of 55 this month to stand at 1,572 (the lowest product count seen since February 2015). It's also a considerable monthly reduction – product movement is typically far less dramatic, with only one month of the last 12 recording a greater drop.

Providers are retreating from the market at an alarming rate, and this, together with such continued and high-level rate cuts, points to a clear lack of desire to compete – and this trend is beginning to impact all sectors of the market.

Zero competitive spirit

Competition is the weakest it's ever been, and our analysis shows that such apathy is no longer confined to high street names – now, even challenger banks are becoming reluctant to compete.

This is in sharp contrast to the pattern seen in recent months. Up until now, challengers had been keeping competition alive, with these newer banks locked in a fight to gain new customers and boost their funding levels. Now they, too, no longer need savers' funds, either because they've built up their balance sheets sufficiently, or for the simple reason that they can access cheap funds elsewhere.

Thanks to wholesale prices being so low, banks simply don't need savers' funds to build up their reserves. This has led to a continuous cycle of rate cuts and product withdrawals – providers don't want to be featured in the best buy charts so reduce their rates, only to heighten the appeal of other providers who then have to reduce their own rates in response. Indeed, cutting rates isn't even enough in many cases, and providers are forced to withdraw products altogether.

Sign of things to come

Other factors are undoubtedly at play too, not least the referendum result and speculation over base rate. The figures were compiled before the Bank of England confirmed that the rate would be cut to a new low of 0.25%, but given that such a cut was widely predicted, providers were already factoring it into their pricing strategies and reducing their own rates in anticipation.

Then there's the fact that the market is still awash with funds as a result of the pension freedoms, which allowed consumers to withdraw as much of their pension savings as they wished. Many will seek easy access accounts before deciding how to invest their savings for the long term, providing further reason for providers to lower their rates as they seek to avoid attracting this pool of money.

As it stands, the current pattern is expected to continue – competition will remain lacklustre and the base rate announcement will only intensify the rate-cutting cycle, which means rates could fall even further in the months ahead.

But don't give up hope! There are still some good deals to be found, and although it may seem that investing in a savings account isn't worthwhile, your funds will do far better in a dedicated savings account (provided it's inflation-beating) than kept under the mattress. You may even want to think outside the box and opt for a high interest current account, or if you've got a higher risk appetite, stocks & shares ISAs could be worthy of consideration, too.

Whatever you decide, make sure to compare the options using our search tools, and you can be confident that you're doing the best you can for your money, regardless of what's happening in the market at large.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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