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Savings rates dropped to a record low during January with notice accounts paying an average of just 0.29%, official figures showed today.
The returns paid on branch-based instant access and notice accounts, tax-free cash Isas and fixed-rate savings bonds are all at the lowest level since records began, according to data from the Bank of England.
And rates look set to tumble further in the coming weeks as banks and building societies begin to pass on last week's half-a-percentage point cut, which took the interest rate to a new low of 1%.
Today's figures, which cover the period before the rate cut, will spark further alarm that the low returns on offer will deter consumers from saving, limiting the funds that banks and building societies have available for mortgage lending.
They will also highlight the problems faced by some pensioners who rely on returns on their savings to boost their income. Last week, some commentators suggested the latest rate reduction was a cut too far and would damage pensioners more than it benefited mortgage borrowers.
The Bank's figures show the average return paid on a branch-based notice account dived by two-thirds from 0.9% in December, as account providers passed on more than the half-a-percentage point cut made to the Bank base rate.
The average notice account is now paying the lowest interest rates since records began in 1995, and offers only around a tenth of the average returns of 2.3% and 3.3% paid as recently as November and October respectively.
Interest rates on instant access accounts also slumped to a new low of 0.51% compared with 0.81% in December – well down on the average returns of 2.77% being paid in January last year.
The average rate paid on cash Isas has fallen to just 1.38%, a far cry from the 5.06% available for new customers 12 months ago. Recently, the Building Societies Association said it had seen huge outflows from cash Isas in the final month of last year, and plummeting rates could encourage more savers to ditch their accounts.
However, there are few alternatives for people's cash. Even fixed-rate bonds, which have traditionally offered savers higher rates in return for them locking their money away for a set period of time, have seen their average rate slump to a record low of 2.35%. In October 2007, when the Bank base rate stood at 5.75%, these savings products were offering average returns of 6.15%.
Reaping the rate cut
There have been some winners from the recent interest rate cuts though – the Bank's figures show the cost of variable rate and tracker mortgages has also fallen to the lowest level since 1995.
The average standard variable rate hit a record low of 4.67% in January, down from 5.38% in December. The drop outstripped January's base rate cut, but this is likely to be because many lenders chose to pass on some of January and December's cuts at the same time.
Tracker mortgage rates for borrowers with a 25% deposit were also down, dropping from an average of 4.92% in December to 4.5% in January, suggesting that lenders increased their margins only slightly following the January base rate cut.
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