Santander's change in rate will be effective from 1 November, and it is also making some changes to the overdraft rates.
In a statement issued this morning, the bank explained its decision had been triggered by market expectations that interest rates would now be staying even lower for longer, combined with changes in the banking sector increasing lenders' costs.
"Market interest rates have fallen considerably since the 1,2,3 Current Account was launched," the bank's statement read. "Top paying Instant access rates in the market were around three per cent, whereas now they are around one per cent."
The new rate on the 1,2,3 account will apply to balances up to £20,000, meaning account holders can continue to rake in up to £298 per year. Customers with less than £1,000 in their account will now also be eligible for the interest rate, which was not previously the case.
"Many millions of savers across the UK will feel like they've been kicked in the teeth," said MoneySavingExpert.com founder Martin Lewis, who first broke the news about Santander's rate cut early this morning. "Santander 1,2,3 has been a beacon, shining out for those with a decent chunk of cash, as at three per cent it pays decent interest. Now it’s halving that, meaning for those with £20,000 saved, it drops from roughly £600 to £300 a year."
Meanwhile, Lloyds, which currently offers up to four per cent interest on its Club Lloyds account, revealed it too was considering where next to turn, although it did not disclose which accounts would be effected.
"We regularly review our savings range and make changes in line with the market," a statement from Lloyds Banking Group read. "Having undertaken our latest review we can confirm that over the coming weeks we will make reductions to our savings rates across Lloyds Bank, Halifax and Bank of Scotland."
Lloyds Banking Group also confirmed it will be slashing the rates on some of its mortgage products – Halifax Homeowner Variable Rate, Halifax Standard Variable Rate and Lloyds Bank Homeowner Variable Rate – from 3.99 per cent to 3.74 per cent. This new rate would become effective on 1 October and the bank added it would not cut its savings rates until the mortgage rate cuts had been passed on.
However, given the downward shift in interest rates earlier this month, some commentators struggled to look surprised.
"For the last couple of years the Santander 1,2,3 current account has been the stand out option for beleaguered savers – paying three per cent with instant access up to £20,000 was too good to be true in the current depressed savings market – the only surprise is that this move didn’t happen at least 12 months ago," said Andrew Hagger of Moneycomms.co.uk.
Jody Baker, head of money at comparethemarket.com, added: "Sadly, with the base rate moving even lower and the threat of another decrease looming, the interest rate cut by Santander is not surprising."
That being said, other banks offering savers high interest deals have not signalled an immediate rate cut. Tesco Bank has confirmed it currently had no plans to lower interest rates on its three per cent current account and TSB is still planning to offer five per cent interest on balances up to £2,000 on its Classic Plus account for the foreseeable future.
Meanwhile, Nationwide said there was nothing in the pipeline to drop rates on its FlexDirect account and has previously confirmed it will not be cutting the five per cent interest rate on its Flexclusive Regular Saver, the 3.5 per cent rate on its FlexOne Regular Saver or the two per cent rate on its Help to Buy Isa.
The building society did, however, reveal a slew of rate cuts to its variable Isa products at the end of last week, cutting the rate on one such product down to 0.25 per cent.
On Friday, challenger Shawbrook revealed it was opting not to pass the reduced rate onto any of its existing savings customers and would only cut rates on new offers for three products, and even then by less than the 0.25 point cut dealt by the central bank.
"Relationships over rates," said chief executive Steve Pateman.