Bank of England punishes savers

This week’s move by the Bank of England to cut the interest rate to an all time low of 1% is a bad move for all of us, especially those trying to save money.

It is an unfortunate double whammy, because while the tax payer is subsidising the banking system via RBS and Lloyds especially though part nationalisation, plus through government guarantees and debt swaps with its special liquidity scheme, the cut in interest rates especially benefits the banks by increasing their profit margins.

A major way banks make their profit is through arbitrage between savings rates on loan rates. In other words, the bank offers a relatively low interest rate to savers, a relatively higher rate to borrowers, and the difference in between is profit.

The problem is that while savings rates have come down a lot, especially as the Bank of England cuts interest rates, the actual borrowing rates remain comparatively high.

For example, with mortgages, it used to be the case that tracker rates would follow the Bank of England’s rate up and down. If they still did this, then many people would be feeling the benefits.

However, lenders have now instituted a “mortgage tracker rate” which means the tracker rate they offer is a few full percentiles about the Bank of England’s interest rate, but does not necessarily comes down if the Bank of England’s interest rate is cut.

Many previous tracker mortgages also came with a mortgage floor which effectively means that the tracker mortgage will not come down below a certain rate, even if the Bank of England interest rate continues to fall.

Coupling the constant cutting of interest rates on savings, with the artificially high mortgage repayment rates, means that the UK’s banks are cashing in at the detriment to the very consumer’s whose taxes are keeping such banks afloat.

We as a nation are therefore hit by a double whammy of subsidising the UK banks directly through billions in government support, and additionally by the banks ensuring that interest rate cuts actually boost their own profit margins.

Not many people are aware of just how depressingly manipulated we are being used to help support the very institutions, whose greed and maladministration brought us into what appears to be a deep recession, and yet it will be the banks who end up profiting most from it.