Gloom as rates are cut again

While mortgage borrowers continue to enjoy ever lower interest rates, the picture for savers remains bleak - and it is about to get worse.

Cheltenham & Gloucester this week knocked 0.25% off many of its savings rates, which on October 1 will see its Cash Isa rate fall from 4.5% to 4.25%. The move comes close on the heels of an unsettling summer of similar cuts by other lenders.

Over the past four months a raft of institutions have hit their savers by cutting rates across branch-based, internet, telephone or postal accounts, as well as Cash Isas. These include Barclays, Northern Rock, Nationwide, Intelligent Finance, Halifax and Abbey National.

A spokeswoman for C&G said the cuts were justified because they had delayed reducing rates even though competitors had slashed theirs. It added that it had largely resisted cuts in the past year in the face of a series of interest rate cuts by the Bank of England.

Speculation is now growing that the Bank of England could cut base rates again to less than the current level of 4%, heralding yet another wave of savings rates cuts.

"We have seen a few savings rates come down recently," says Melanie Stewart from independent financial data provider, Moneyfacts. "Lenders have to balance their books. In a low interest environment where mortgage rates are being cut savings rates are also cut and this hits people who depend on their savings for income most of all."

The big banks rely on iner tia among savers to make money when they cut rates. "The thousands of people on low rates - and the worst affected are those whose accounts are with the main high street banks - are actually subsidising anyone benefiting from slightly better rates because their accounts cost less to run," says Ms Stewart.

Going against the grain, Abbey National recently increased the rate on its eSaver account to 4.4% gross per anum. But, as with many new offers, it includes a bonus for the first six months and once the introductory period is up the rate reverts to 3.95%.

And, in common with other banks, a look at the full range of accounts reveals an ongoing trail of periodic rate reductions. In June this year, for example, Abbey National's Flexible Saver instant access account went down by 0.1%. This was on top of a 0.5% cut six months earlier. The current rate is now 1.6% if counter transactions are used and 3.1% without branch use.

The banks and building societies point out that they have not cut savings rates exactly in line with Bank of England base rate cuts. But, as Melanie Stewart says: "When some rates are as low as under 1% what else could they do? Where do they go if their rates are already below 1%?"

However, there are some reasonable rates available, with some paying more than 4.5% - primarily online and in Isas.

In a low interest market the first port of call for any saver should be Cash Isas. "Use up as much of your tax-free allowance as possible," Ms Stewart advises.

· Where to look for a deal that's worth having

Internet Only Accounts

Abbey National eSaver -4.40% (£500 deposit)

Coventry Building Society NetSave - 4.40% (£500 deposit)

Northern Rock Tracker online - 4.35% (£1 deposit)

Halifax Web Saver - 4.05% (£1 deposit)

Instant Access

Scottish Widows Instant Transfer - 4.05% (£100 deposit)

Bristol & West Easylife - 4.0% (£100 deposit)

Cheltenham & Gloucester Tracker -3.85% (£100 deposit)

Notice Accounts

Safeway 60 day postal notice account - 4.30% (£500 deposit)

Scarborough Building Society 80 day account - 4.30% (£100 deposit)

Universal Building Society 60 day Direct Tracker - 4.50% (£2,000 deposit)

Scottish Widows Bank 60 day notice - 4.10% (£100 deposit)

Mini Cash Isas*

Northern Rock 30 day notice - 4.65% (£1 deposit)

Kent Reliance Building Society instant -4.40% (£1 deposit)

Stafford Railway Building Society instant - 4.35% (£250 deposit)

Tipton & Coseley Building Society seven- day notice - 4.35% (£1 deposit)

*All subject to maximum £3,000 investment in a single tax year

· Source: Moneyfacts