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Why are savings rates falling so low?

Why are savings rates falling so low?

Category: Savings
Author: Leanne Macardle
Date: 20/03/2018

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

It hasn't been a good few years for the savings market. Rates have been on a seemingly permanent downward spiral with no end in sight, but just why are they falling so low? It's a question many savers are asking themselves, particularly with our latest figures showing that average rates have plunged to record lows once again, so we thought we'd take a look at a few reasons why this might be happening.

  • Funding for Lending Scheme (FLS). The FLS undoubtedly kick-started the trend of rate cuts, with the scheme – which gave banks and building societies access to cheap funding which they could lend out to customers – essentially meaning that providers no longer needed savers' cash to fund their lending activities. Prior to the FLS being introduced in 2012, providers offered higher rates because they relied on cash deposits, but this is no longer the case. Not only that, but the recent announcement that capital adequacy rules are being eased (which frees up even more cash for banks to lend) could mean there's even less need for providers to seek savers' funds, so the trend looks set to continue.
  • PSA. The Personal Savings Allowance was introduced in April this year, it's had a dramatic impact on ISA rates. Given that savers can now earn tax-free interest of up to £1,000 no matter where the funds are held, it's perhaps understandable that ISAs have lost their sheen somewhat, and this has arguably been the biggest driver of ISA rate cuts in recent months.
  • Pension freedoms. You may wonder what pensions have to do with savings rates, but the latest reforms have actually had a notable effect. Last year's freedoms removed many of the restrictions surrounding pension access and gave people more choice over how to spend their pots, and since then many have taken the opportunity to withdraw their entire pot for their own means. However, if they don't know what to do with it straight away, they'll be seeking a savings account to keep it in – and as providers still don't need savers' funds, the flood of money into the market has fuelled even more rate cuts.
  • Economic uncertainty. The recent level of economic uncertainty has had a notable impact on financial markets at large, and savings rates are particularly at the mercy of such uncertainty. The referendum result may now be known, but how it's going to impact the savings sector – and the economy as a whole – is less clear, and this is understandably weighing on providers' minds. Indeed, anecdotal evidence suggests that many are actively turning away from the market until a more stable picture emerges, so things could remain lacklustre for a while to come.
  • Base rate. Combined with economic uncertainty is ongoing speculation over the path of base rate. Despite the fact that the Bank of England's rate setting committee last week voted by a majority of 8-1 to leave base rate on hold at its record low of 0.5%, it's widely felt that this may not be the case for long. Predictions are rife that a reduction could be implemented in the August meeting, and this expectation could already be adding downwards pressure to the savings sector, with providers beginning to factor this potential rate cut into their pricing.

As you can see, there's no hard and fast answer as to why rates have fallen to such an extent, but rather it's a combination of several factors that are exerting their own influence. Individually they may not have such an impact, but together they've created a perfect storm that has caused rates to plummet, and until proper stability returns to the market, this pattern unfortunately looks set to continue.

What next?

Rates may be falling, but that makes it more important than ever to stay on the ball. If you're not getting the kind of rate you want, compare the top accounts to make your money work as hard as possible.

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.