Savers losing the fight

Another month, another rate cut. At least that is the way things are going at the moment, and could go for the forseeable future.

So far this year, the Bank of England has made six rate cuts, bringing the base rate from 6% to 4.5%. Yet, while the decision might help boost the economy and bring down the cost of owning a house, it comes with a big sting in the tail for savers.

According to data analyst Moneyfacts, the average instant access rate on a ?5,000 deposit is now just 0.61% after tax. This has fallen from 1.34% this time last year, when the base rate was 6%.

In other words, if you keep a deposit of ?100 a year in your account, this would be worth just ?100.61 by the end of the year.

Some banks, such as Abbey National, have already taken a stance against falling interest rates. It created a stir last month when it said it would no longer be cutting its mortgage rates in line with Bank of England cuts in order to protect its savers. It has just announced it will only reduce its standard variable rate by 0.15% to 6.5%.

Banks and building societies will have to weigh up their ratio of savers to borrowers before making a decision about who should benefit from any further cuts. But there is already evidence that borrowers will benefit and savers will lose out again.

Nationwide was quick off the mark to announce it is reducing its base mortgage rate to 5.24% from 5.49% for new and existing borrowers from November 1. A spokesman for the society said it would be their lowest rate since October 1955.

However, savers with the building society's eSavngs account are likely to suffer again as they have already seen the interest rate on the account cut by 1.7% this year - greater than the 1.25% base rate fall which existed before today's decision.

Halifax has also announced it is reducing its variable rate to 5.5% from 5.75% from November 1 for new and existing customers.

Not all banks and building societies feel comfortable about their suffering savers. Martin Ritchley, chief executive of Coventry building society said today that he had been expecting a decoupling of mortgage rates from base rates, to help savers.

"From what I have seen so far this afternoon, banks and building societies are passing the rate cut on the mortgage side, which means savings rates will go down," he said. "I'm surprised there has not been more effort to compensate savers. It's difficult to see how we can keep ignoring savers as savings rates can hardly fall much further."

"We're almost in a farcical situation where we'll be paying borrowers to borrow from us next!" he added.

The best savings rates are still available through the internet banks. Cahoot currently pays up to 5.8% for deposits of as little as ?1 on its current account, although it is reviewing this rate in light of today's announcement.

Rival bank Intelligent Finance, Halifax's internet arm, pays 5.01%, although this is likely to be reduced after today's decision, as IF has just cut the standard variable rate on its mortgage to 5.5%

The best way to save, if you intend to save no more than ?3,000 a year, is still via a cash individual savings account (Isa) which allows you to save without paying tax. For deposits of as little as ?1, the best of these is offered by internet bank Smile which has just cut its rate from 5.5% to 5.25%.

However, savers can gain some comfort from Smile's guarantee to keep this rate at three quarters of a percentage point above the base rate until the end of the year.