Hi °C | Lo °C Savers were bracing themselves today for further falls in the returns they earn on deposit accounts as interest rates fell to a new record low.
The cut in the Bank of England base rate to just 0.5% also prompted warnings that consumers could be discouraged from holding money in bank and building society accounts, further reducing the supply of funding available to mortgage lenders.
The latest interest rate cut was announced as angry savers protested outside the Bank of England, demanding a better deal after seeing the returns they earn on their money dive since October.
Adrian Coles, director-general of the Building Societies Association, said: "Today's decision is a kick in the teeth for savers who will see their already diminished interest payments fall even further.
"It will also harm the aspirations of the many people who are finding it difficult to get a mortgage, particularly first-time buyers with relatively small deposits.
"Lower interest rates reduce the incentive to save, and in turn, this limits the flow of funds into the mortgage market."
Around 86% of savings providers reduced the interest they pay on their accounts by 0.5% or more following February's base rate reduction as competition evaporated from the market.
The latest figures from the Bank of England show that savings rates dropped to a record low during January with notice accounts now paying an average of just 0.29%.
The returns paid on branch-based instant access and notice accounts, tax-free ISAs and bonds are all now the lowest since the Bank's records began.
Andrew Hagger, of Moneynet.co.uk, said: "The MPC (Monetary Policy Committee) continues to plough on with its blinkered rate-cutting crusade without a thought for beleaguered savers.
"With an estimated six savers to every borrower, it is the majority who are once again getting a raw deal on the back of the 9th rate cut in just 15 months."
The fall in interest rates is particularly bad news for pensioners who rely on returns on their savings to supplement their income.
The Local Government Association also warned the latest cut would dent the income councils received on money they held in deposit accounts.
Local authorities are already forecasting a £600 million drop in the returns they get from this source during the coming year.
Interest rates have now fallen so low consumers are beginning to withdraw their money from savings accounts to put it into higher yielding investments.
The British Bankers' Association said a record £2.3 billion of savings was withdrawn from banks during January.
But Barclays offered some good news to its savings customers today, when it pledged to keep the rates it pays on deposit accounts unchanged, despite the latest base rate cut.
Meanwhile, commentators warned the historically low level of interest rates could hasten the demise of free banking in the UK as banks' margins continue to be squeezed.
Kevin Mountford, head of banking at moneysupermarket.com, said: "Free banking was under pressure any way.
"Banks are being squeezed and they need to look at alternatives (to make up revenue) and the current account market is an obvious area."
He said free banking was already expected to end if the High Court test case into unauthorised overdraft charges leads to a cap being placed on the fees banks can levy on people who go into unauthorised overdraft, while the case could also open the flood gates for people to reclaim the charges.
But David Black, of market analyst Defaqto, said banks were more likely to look to make up their revenue from falling margins in other areas, such as through higher credit card and unsecured loans rates, although he added that the outcome of the OFT test case could lead to charges on current accounts.
