Rate cuts hit savers but borrowers miss out

British families were dealt a double blow by the country's banks and building societies at the end of last year, as average savings rates were slashed to all-time lows of below 1 per cent, while new mortgage rates were cut by a much smaller margin.

According to statistics from the Bank of England, published yesterday, banks and building societies were quick to pass on most or all of the three base rate cuts, which took place between October and the beginning of December, to savers.

By the end of December, the average instant access savings account was paying just 0.81 per cent, compared with 2.78 per cent a year ago, while the average notice account was paying 0.82 per cent, compared with just under 4 per cent at the end of 2007.

At the start of 2008, the official Bank rate was at 5.5 per cent. But rate cuts in February, April, October, November and December saw it fall all the way to 2 per cent.

"These figures are no great surprise," said Michelle Slade, an analyst at Moneyfacts.co.uk. "Rates have been coming down quite dramatically in the last four months. This proves that savers are being penalised at the moment and are struggling to find accounts that pay good returns. It is a really tough time for some people."

However, in spite of these sharp cuts, mortgage rates have not come down nearly as quickly as the central bank and Government would have hoped. New mortgage customers saw little or none of the Bank of England rate cuts passed on between October and December, with average home loan rates falling by just over 1 percentage point, compared with a 3 point fall in the Bank rate. Meanwhile, mortgage rates for borrowers looking to borrow 90 per cent or more of a property's value have continued to stay above 6 per cent.

The official Bank of England rate was cut by another 0.5 percentage points last week, taking it to all-time lows of 1.5 per cent. As a result, savings rates are likely to fall even further this month. But there is still no sign that the cuts will be passed on to most borrowers.

The one group of beneficiaries from the recent round of rate cuts has been those homeowners on tracker mortgage deals – most of whom will have seen their mortgage payments fall by hundreds of pounds a month since the beginning of October. However, even this group of borrowers may not all be benefiting, with several lenders now calling on the smallprint of tracker deals, which allows them not to pass on savings should base rates fall below a certain level.

Mortgage lenders have repeatedly warned that more demanding requirements on their capital positions and a shortage of funding in the wholesale money markets are preventing them from passing on mortgage rate reductions.

The Bank's data will also worry the Monetary Policy Committee, which has become increasingly concerned about the "transmission mechanism" – the extent to which base rate cuts actually produce any tangible benefits for consumers that might eventually feed through into a recovery from recession.