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Low interest rates are crippling savers

SO the Bank of England agrees that the recession has bottomed out &ndash; but it is refusing to be too optimistic about the recovery, and expects interest rates to remain at 0.5 per cent for a year or so. All very sensible; but this only tells part of the story for borrowers and savers.<br /><br />As a fresh analysis by Michael Saunders, Citigroup&rsquo;s in-house economics guru, points out, the pass through of lower policy rates to banks&rsquo; lending rates remains rather limited. In April, the standard variable rate fell to 3.83 per cent from 4.03 per cent in March. However, most new mortgages are trackers or fixed rates and these dropped less, with tracker rates down 0.15 percentage points in April. Some have actually gone up, including 2-year fixed rates which have jumped 0.12 percentage points. Unsecured lending rates did not fall at all in April and remain higher than a year ago: despite the lowest base rates for three centuries, the average rate on bank overdrafts is 18.63 per cent, the highest since data began in 1995. I suspect there are several reasons for this, not least that banks are pricing in a much greater risk of default because of the recession (in 1995 and subsequent years, unemployment was falling; now it is surging). Banks&rsquo; cost of capital has also gone up.<br /><br />Meanwhile, as Saunders explains, deposit rates continue to fall more rapidly than lending rates, except for those deposit rates which already are virtually at zero. This is a total disaster for savers &ndash; which perhaps helps to explain why retail sales have held up so well, helping to boost the likes of J Sainsbury. The average tracker rate (3.86 per cent) is now 3.45 percentage points above the average on a sterling individual savings account (Isa) (0.41 per cent). That spread averaged just 0.9 points between 1999 and 2008.<br /><br />Such a massive gap will boost bank profitability and help rebuild their reserves of capital, but will make the public even angrier at the industry while reducing the positive impact of the ultra-low interest rates and the huge monetary stimulus.<br /><br /><strong>MORE BROWN HYPOCRISY</strong><br />Further proof that politicians are guilty of double standards: yesterday&rsquo;s callous u-turn by the Treasury. It has decided to keep &pound;110bn of private finance initiative (PFI) liabilities off its books. Gordon Brown is right that the City must end its foolish off-balance sheet practices &ndash; but why can&rsquo;t he raise his own game?<br />allister.heath@cityam.com