The era of rock-bottom interest rates celebrated its tenth birthday last week, with savers across the UK finding far less in their bank accounts than they may have originally anticipated.
The Bank of England has not increased rates since 5th July 2007. When the financial crash occurred, rates tumbled to 0.5% over a period of 20 months. The result of last year’s EU referendum saw rates plummet even further to 0.25%.
The Bank made such cuts to encourage firms and consumers to continue spending and to avoid frozen credit markets. Although this has been good news for borrowers, savers have received very little reward for their frugality.
A decade ago, just £23bn was saved in deposit accounts with no annual interest. Most savers were earning 3.3% on average in instant access accounts while others were earning 5% on accounts that required notice to withdraw.
Now, a whopping £180bn of cash savings sits in accounts that generate no interest. Savers willing to shop around earn just 0.4% in instant access savers while those with notice accounts earn 0.9%. Current accounts have offered more generous gains in recent years, but these have have been slashed by leading banks in the last 12 months, dealing an additional blow to those saving for everything from holidays to house deposits.
This fall in interest rates means that consumers who put £1,000 cash in a savings account in 2007 will now have the equivalent of £878 when the impact of inflation is taken into account.
Those with money in the stock market are likely to have seen actual gains. A £1,000 investment is now worth £1,323 on average.
The real winners of falling interest rates have been borrowers. For the 7 million households with a mortgage, the average interest bill has fallen from 5.8% to 2.6%.
Some homeowners have resorted to using excess cash to make overpayments on their mortgage in a bid to further slash the amount of interest they owe and pay off their debts faster.
