Lending scheme 'punishing savers'

The Bank of England's scheme to boost lending across the economy is having a "punishing effect" on savers and no longer leading to a reduction in new mortgage costs, it has been warned.

A host of major banks and building societies, enjoying cheap cash from the BoE's Funding for Lending scheme, are withdrawing savings accounts or cutting rates at a rapid rate.

Last week, the Nationwide building society stunned its account holders by reducing a host of rates across its range. It excused the cuts by saying it had to move the society's deals "in line" with rivals' falling rates.

According to Charlotte Nelson, savings expert at Moneyfacts, Nationwide is far from alone in cutting rates, and it is a direct result of the BoE's Funding for Lending scheme. This sees up to £80bn being injected to help boost the availability of credit to business and mortgage borrowers.

"The Funding for Lending scheme is having a punishing effect on savings rates," said Ms Nelson. "Returns are falling across the board as banks and building societies find that because of the cheap money coming from Funding for Lending they have little need for savers' deposits."

Research by Moneyfacts for The Independent on Sunday has shown that average savings rates on one-year individual savings accounts have fallen by more than 1 percentage point in the past year.

It also seems that the Funding for Lending scheme is no longer having the desired effect of boosting availability of mortgages. "Many potential first-time buyers are still being left out in the cold with the number of deals available to them actually falling of late," Ms Nelson said.