Market News

Savers have been hit by falling interest months before the Bank of England cut rates to their lowest level in two years.

Almost all banks cut the rates of interest paid to those with savings since August, analysis by Moneyfacts shows, despite the Bank holding its rate between August and December.

Threadneedle Street voted to slash the base rate of interest from 4pc to 3.75pc on Thursday – a move which typically sees providers pull more generous savings deals from the market.

Those with flexible savings accounts, which allow withdrawals at short-notice, are likely to see the greatest financial loss as a result.

Average savings rates across easy access accounts, those that require a notice period, and Isas have fallen from 4.23pc in December 2023 on average to 3.40pc this month overall, according to Moneyfacts.

It means that someone with £50,000 in savings would see their annual return fall from £2,156.49 to £1,726.74 for the same amount.

Banks have been slower to pass on interest rate cuts to borrowers with mortgages than they have to slash interest rates paid to savers, the analytics firm found.

Rachel Springall, of Moneyfacts, said: “Savers with the most flexible pots are hit the hardest by cuts to the Bank of England base rate as providers use this as a signal to reduce variable rates.”

She said those who had bought fixed-rate bonds or Isas would also see an impact as a result of the lowering of the base rate of interest, but that they had a few months’ grace period to switch to better deals.

This will “disappoint savers who want a guaranteed return on their hard-earned cash. It can take a couple of months for the savings market to catch up to rate cuts, so it’s vital savers check the latest rates and switch if they are now getting a paltry rate,” she added.

The Bank of England Monetary Policy Committee, which decides whether to increase, cut or hold the central rate of interest, voted five-to-four to cut interest rates to 3.75pc, the lowest they have been since February 2023.

It is the latest blow for savers, many of who face losing out on valuable tax allowances after Chancellor Rachel Reeves extended a freeze on the tax-free personal allowance at the Budget last month.

Millions of workers are expected to be dragged into higher tax brackets as a result.

So-called fiscal drag means any basic-rate taxpayer who moves up to the higher-rate tax bracket at 40pc will see their Personal Savings Allowance (PSA) halved, from £1,000 worth of savings interest tax-free each year to just £500.

Ms Springall said that earners would be “dismayed” to see their tax-free allowance slashed.