Banks raise deposit rates as battle for savers' funds intensifies

Lloyds TSB has upped the stakes in the increasingly fierce battle to win new current account customers, increasing its credit interest rate from 4 to 6 per cent to try to bolster its deposit balances.

Britain's high street banks have been doubling their efforts to get their hands on consumers' savings over the past few weeks, launching a raft of new products with ever more competitive interest rates, as they attempt to improve funding levels with retail deposits.

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Lloyds announced yesterday that it will now pay interest of 6 per cent on all balances of up to £2,500 for new customers of its Plus accounts, falling back to 4 per cent at the end of the first year. Elsewhere, Alliance & Leicester and Abbey both have current accounts that pay interest rates of 8.5 and 8 per cent respectively for new customers during the first year.

Lloyds' move follows an announcement of a new range of current accounts from Barclays 10 days ago. Barclays overhauled its account charges, creating a new, fairer structure, which should see fewer customers rack up hefty bills for accidentally going past their overdraft limit. Similarly, last week, Halifax launched a new 10 per cent regular saver account – one of the first to pay the high rate of interest on the first £500 of savings each month, rather than just the first £250.

Fixed-rate bond rates and regular savings account rates have also stayed well above the Bank of England base rate – currently at 5 per cent. The best one-year fixed-rate bonds are currently paying just over 7 per cent, while the top rates for cash ISAs and no-notice accounts are well above 6 per cent. The accounts have attracted substantial retail deposits from savers.

David Black, the head of banking at the financial consultants Defaqto, said there were two major factors at play in the banking sector at the moment. "They're clearly keen on winning retail funds, as wholesale money is still hard to come by," he said. "But in the current account market, it's slightly different. They're also keen to cross-sell other products to these customers."

Mr Black said that in its recent annual report, Lloyds TSB admitted it had been having great success at cross-selling to its current account customer base. While Alliance & Leicester – which has made one of the most aggressive plays for new business in the current account market over the past 12 months – said in its own annual report that cross-selling will be a major part of its retail strategy in 2008.

Cross-selling from current accounts also enables banks to increase funding levels, with savings products the most common additional add-ons.

Samantha Owens, the head of personal finance at the comparison website Moneyfacts.co.uk, said most of the high interest-paying current accounts require that customers pay in a minimum of at least £500 or £1,000 a month, sometimes more – ensuring that all new customers have adequate means to deposit other funds from the bank.

"Those without this amount to pay in will have to settle for the standard accounts which currently pay 0.1 per cent," she said. "It appears that those who have the funds can benefit from better interest and better overdrafts, but are those that would benefit the most from these deals being excluded from the market?"

Cahoot is one of the only banks to offer a reasonable interest rate without the requirement to pay in a minimum account each month. However, customers have to be satisfied to live without branch access, and even a cheque book, if they want the best rates here.

Although Mr Black conceded that competition in the regular current account market was fierce, he said most banks were putting more effort into getting customers to subscribe to their so-called "added-value" accounts, which charge a monthly fee. These often pay a medium rate of credit interest and also have other benefits such as free travel insurance and shopping discounts.