Savings rates could fall even further, experts warn

Savers’ misery is not over despite the Bank of England steering clear of negative interest rates, experts have warned.

The Bank of England held rates steady at a historic low of 0.1% on Thursday.

But Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said despite no change, savers can expect their returns to carry on dwindling.

Ms Coles said the hike in the Bank’s quantitative easing (QE) programme will push bond yields down.

She said this usually means savings rates drift lower, because banks can attract money at lower rates.

Ms Coles added savings rates also depend on mortgage demand.

The housing market has recently had a mini-boom as homebuyers take advantage of a temporary stamp duty holiday.

But with England now in a second national lockdown and tough economic conditions ahead this could put the brakes on the housing market and mortgage demand – and feed into savings rates.

Ms Coles said: “The Bank of England steered clear of negative interest rates but this doesn’t mean the misery is over for savers.

“Before the MPC (the Bank’s Monetary Policy Committee) report, all the talk was of the potential for rates to turn negative.”

She said despite rates being held at 0.1%, “this doesn’t mean savers are home free”.

Ms Coles said: “Wrapped up in the announcement were signs that savings rates are on their way down.

“QE was boosted more than expected, which will put more downward pressure on savings rates.

“Meanwhile, lockdown and economic woes are expected to slow the mortgage market down.

“This means the banks don’t need to raise as much cash from savers so can drop rates again.”

She added: “Rates are already at rock bottom – paying an average of 0.08% on easy access savings and 0.29% on fixed rate and notice accounts.

“The best rates have fallen away, too, with the best fixed term rates falling last week and the best easy access withdrawn or cut back this week.”

Ms Coles said low rates should not put people off building a savings buffer.

“It’s vital we have an emergency savings safety net at times like this,” she said.

“This doesn’t mean we should settle for a miserable 0.01% from the high street giants, though.

“It’s vital to shop around for a competitive deal because while inflation is likely to be rock bottom for the rest of 2020 it is predicted to rise again from the start of next year.”

Anthony Morrow, co-founder of money management firm OpenMoney, said people with higher amounts of savings held in cash may want to consider investing in stocks and shares if they are able to put their money away for at least five years.

He said regardless of the base rate being held at a historic low, some borrowers may find their costs have increased.

Overdraft rates have doubled for many customers, with banks clustering their rates around 40% as they comply with new industry rules.

Mr Morrow said for those struggling financially due to coronavirus: “Banks are obliged to provide extra support to customers in financial difficulty, including suspending or waiving further interest or charges to stop debts spiralling out of control, so make sure you speak to your provider as soon as possible if you are struggling with repayments.”

Mortgages are also becoming more expensive and harder to take out.

The Bank said quoted rates on new fixed-rate mortgages continued to increase in October.

The number of mortgage approvals in September was the highest since 2007, and the Bank said lenders may be using pricing to manage demand within their operational constraints. Such constraints might be expected to be relatively short-lived, it said.

The supply of low-deposit mortgages has fallen back particularly sharply, apparently reflecting higher borrower credit risks, the Bank said.

This might be more persistent than the effects of operational constraints, it added.