Nationwide raises current account ante

First blood to Nationwide in the 2006 current account war.

On balances of up to £2,999 on its FlexAccount, the building society is hiking the interest paid from 3 to 4.25 per cent from 1 April. That's more than the rate on offer in many savings accounts. For any sum above the £2,999 threshold, the rate is 0.25 per cent

Both existing and new customers qualify for the new deal but they must pay in at least £1,000 a month.

Nationwide calculates that people with £3,000 going into their bank account every month, who then spend £1,500 in the same month, could be better off by £130 a year compared with a rival high-street bank that pays 0.1 per cent.

Given that many banks still pay this paltry sum on basic current accounts, Nationwide hopes to tempt new customers who have stuck with their old banks for too long - and cross-sell other, more lucrative, financial products to them.

It faces an uphill struggle, though. Indifference and ignorance prevent millions of people from switching to a better deal.

This passive loyalty is regularly shown to be misplaced, with credit balances as low as 0.1 per cent and overdraft fees as high as 18 per cent - with hefty charges for unauthorised borrowing. In another new initiative on this account, Nationwide is offering a 7.75 per cent overdraft rate

Andrew Hagger of financial analyst Moneyfacts says the 4.25 per cent deal on balances in credit is "not to be sniffed at". But he wonders if it will be enough "to break through the wall of lethargy and encourage consumers to ditch their existing current providers".

Nationwide is not the only provider to shake up its current account deal; other banks are now offering price promises, free travel insurance and better rates. However, some of these rival deals have more strings attached. For example, Abbey's new 6 per cent interest rate is only available to new customers, and just for the first 12 months.

While the comparison websites uswitch.com and moneysupermarket.com have nothing but praise for the Nationwide account, Sue Hannums at independent financial adviser Chase de Vere insists it "takes a lot to beat the deals offered by Alliance & Leicester". If you are happy to bank online and pay in £500 a month, its Premier Direct account pays 4.89 per cent.

She also picks out the Halifax's branch-based account. This offers 2.5 per cent if you pay in £1,000 a month.