Should we punish savers to help the feckless?

[Bagpuss]

Yet by cutting interest rates the Bank of England is - in a way - punishing the thrifty and rewarding the feckless.


Has Peston been reading my posts on CUK?

[Pogle]

Hmm not many Christmas avatars on this thread.
Is there a link between whinging about the economy and not wanting to appear festive?

[Bagpuss]

Appearance is not always the same as actuality.

[Doggy Styles]

Yet by cutting interest rates the Bank of England is - in a way - punishing the thrifty and rewarding the flipless.


Has Peston been reading my posts on CUK?

The question is, are you Peston?

Not to be confused with Preston...

[Bagpuss]

The question is, are you Peston?

Not to be confused with Preston...

I don't have his dramatic delivery

edit FFS down to 2%, soon I will have to pay them to keep my money!

[DimPrawn]

Hmm not many Christmas avatars on this thread.
Is there a link between whinging about the economy and not wanting to appear festive?

It offends Muslims.

[Mich the Tester]

My only substantial debt (beyond an occasional 1000 euro overdraft) is a typical Dutch mortgage with interest at a fixed rate of 5.8% for 20 years. I've got another 14 years to go on the fixed rate and by them I plan to have paid it off; frankly I'm quite happy with an interest rate rise as my savings will pay more interest and my mortgage will cost no more.

It amazes me that in the UK people still have variable rate mortgages or only short term fixed interest. Here you can fix the interest (at a slightly higher rate) for the entire duration of the mortgage (maximum 30 years). I'm sure that this would make the housing market more stable and help people sleep more easily at night.

[d000hg]

Nope, we're talking about old people for whom £20 a week extra is a lot, wherever it comes from. Being rich contractors I think we lose sight of the small numbers involved here.

Lets say you get £20 a week less a week in interest. That means you make about £1000 less a year with a 1% cut. For 1% to be worth £1000 you must have £100K in the first place. If you have £100K in savings you can manage to supplement your pension for a couple of years... maybe less inheritance for your children but that's their problem.

I don't think my maths is wrong, approximate as it is? I haven't made a factor-of-ten error?

[gingerjedi]

I don't think my maths is wrong, approximate as it is? I haven't made a factor-of-ten error?

I thought you might have a 'Levi Roots' moment for a minute... but I think it's Ok.

[Bagpuss]

What about the savers?
By Lorna Bourke | 12:01:01 | 04 December 2008

While much will be made of the cut in Bank Base Rate and whether or not it will be passed on in full to mortgage borrowers, little is said about the many millions more savers, mostly elderly people, who will see their income slashed yet again.

For every mortgage borrower there are seven savers and they have seen the return on their savings come down from over 7% gross to today’s level of 5% and are likely to see it drop to 4% or less. The banks are never slow to pass on any rate cuts to savers – even if they drag their feet over reductions in mortgage rates.

Given that a shortage of funds – rather than the price of funds – is the problem afflicting the mortgage market, it is doubtful whether cutting rates will have any beneficial effects whatsoever, since it is likely to stimulate demand for loans at a time when money is in short supply.

The authorities have lost control of interest rates. Bank Base Rate has come down from 5.75% in December 2007, less than a year ago, to today’s rate of 2%. But since then banks have increased the rates on personal loans, overdrafts, credit card borrowing – all of which have become more expensive - and in some cases even mortgages. If a shortage of funds is the problem, why discourage savers by reducing rates? And wasn’t cheap money the cause of the boom in house prices in the first place?
The government should be encouraging savers – not penalising them. In fact, a far more efficient way of stimulating the economy and encouraging savings would have been to give a tax concession on savings – for example, the first £5,000 of interest could be tax free – rather than cutting VAT by 2.5% which it is generally agreed will do nothing to stimulate demand.

Pensioners need every penny of their income and a tax break on savings would undoubtedly have fed through into spending on food, cars, household goods, medical care etc for these savers. Pensioner pressure groups have argued for years of the immorality of taxing savings income which derives from taxed income anyway.

The reason we are currently in a mess is because the banks lent more than we deposited with them to the tune of £700 billion. When the wholesale markets dried up there was a huge shortfall.

Following today’s cut in Bank Base Rate there will be a huge fuss if the banks don’t pass on the reduction in full to borrowers. But since they haven’t done so to date, there is little likelihood of them doing so this time.

The mortgage lenders have reduced their Standard Variable Rates but since at the moment very few borrowers are paying this rate – an estimated 800,000 out of over 11 million borrowers - it doesn’t mean much. And because SVRs are now mortgage ‘best buys’ the banks have closed SVRs to new borrowers, negating the whole point of Bank Base Rate reductions. Meanwhile they are quick to slash rates to savers thereby widening their profit margins yet again.

Lowering interest rates is punishing those who were sensible enough to save for their future while rewarding those who – in some cases – borrowed more than they could afford.

With the wholesale money market not functioning it is vitally important that the banks attract savings and deposits – yet lower interest rates will encourage savers to look around for alternatives, or force them to spend capital to maintain their standard of living.

And it’s already happening. Savings levels fell by over £19 billion over the last quarter although that is balanced by a net reduction in debt of £23 billion. However, those reducing savings are likely to be the elderly who need savings to subsidise income while those reducing debt are more likely to be those in employment paying off their credit card debts.

Savings levels almost halved over the last quarter to an all-time low, from £38.5 billion in quarter two of 2008 to £19.3 billion in the third quarter - a reduction of over £19 billion. Is this really what the government wants? Isn’t it about time we thought of savers?