No rush to cut rates by cautious lenders

When there is a cut in interest rates lenders usually scramble to be the first to announce a mortgage rate cut. Not this time, though.

Banks and building societies reacted cautiously to this latest reduction, muttering in the hours following the announcement that savings and mortgage rates were "under review" and they were "considering the position".

The reason lenders are nervous about passing on this week's cut to their customers is that they have to strike a balance between the needs of both borrowers and savers, and while the former are enjoying the lowest mortgage rates for three decades, the latter are being squeezed until the pips squeak.

Yet another wave of cuts to savings rates could drive many more away from high street banks and building societies into the arms of better-paying new entrants such as Egg and Virgin Direct... and that's a nightmare scenario for the established players. Savers outnumber borrowers by seven to one.

One of the few major institutions to announce its intentions immediately was Bradford & Bingley Building Society, which said it was keeping its mortgage and savings rates where they are for the moment.

"Savers have seen their rates reduced as a result of recent base rate reductions. We think it is now time for the market to better support the needs of savers," says chief executive Christopher Rodrigues.

However, bear in mind that Bradford & Bingley has its own reasons for keeping the majority happy - it is currently in the middle of a crucial vote on whether it should convert to a bank.

These are grim times for savers, millions of whom have seen the interest they earn on their hard-earned cash hit rock bottom. A comparison of the position today with five years ago shows just how badly the public are being short-changed.

The average instant-access account rate now stands at just 1.57 per cent gross - five years ago it was 3.83 per cent gross, according to financial data specialists Moneyfacts. Yet the bank base rate is exactly the same as it was five years ago - 5.25 per cent.

Ten years ago, instant access accounts paid an average of 11.45 per cent gross. These figures are based on an investment of ?5,000, so for people with less than this in their account, the average rate will be considerably lower than 1.57 per cent gross.

But there are still good deals to be had if you are looking for an instant-access-type account. Egg, Prudential's banking arm, is still paying 6 per cent gross on balances from ?1. It is guaranteeing that its rate will be 0.5 per cent above base rate until January 2000 and at least base rate until January 2001.

Virgin Direct announced moments after Thursday's rate cut that it was keeping the rate on its deposit account at 5.75 per cent gross. Again, the minimum deposit is just ?1.

Other decent-paying no-notice accounts include Scottish Widows Bank's Instant Transfer, which pays 5.8 per cent gross on amounts from ?100 to ?9,999, and Yorkshire Building Society's Postal Saver, currently paying 5.5 per cent gross (minimum deposit ?1,000).

The message to savers, therefore, is to watch the banks and building societies like a hawk. "You have got to be extra-vigilant," says Vicki Burn at Moneyfacts. "There are reasonable returns to be had but you have got to work at it. You can't be complacent."

Take your eye off the ball for even a few months and you could find that what was once a decent-paying account has been slashed, lopped and chopped beyond recognition.

Many analysts reckon we are in for one more quarter point base rate cut, which will come by June. There could then be a period of calm before rates start to creep up next year. But the Council of Mortgage Lenders reckons interest rates "may have now reached their trough for the foreseeable future" and says it is "cautious" about the prospects for further mortgage rate cuts.

Among those who will be miffed if lenders don't reduce their standard variable rates much further will be people who flocked to take out discounted rate mortgages during the last two months in the expectation of a cut. "Some of them might feel a bit disgruntled. But they are still getting a good deal and are paying less than the standard variable rate," says Siobhan Hotten at mortgage brokers John Charcol.