Savers are going to bear the brunt of the Bank of England's attempts to revive the economy

Mervyn King suggests savers will be sacrificed as rates fall
Savers are going to bear the brunt of the Bank of England's attempts to revive the economy, the Bank of England Governor Mervyn King has warned.

By Myra Butterworth and Edmund Conway
Last Updated: 4:35PM GMT 11 Feb 2009

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Mr King expressed sympathy for savers, but indicated that they will be sacrificed as interest rates are cut further in a bid to revive the economy.

He said: "I have every sympathy with savers – they are certainly not responsible for the current difficulties – but suppose we were to put up interest rates?

"That might benefit savers in the short run, but is anyone seriously suggesting that would help the British economy get through the recession? No. We have to take action to increase the supply of money in the economy, to increase spending in the short run, in order to dampen the strength of the recession."

The Bank of England is widely expected to reduce rates to zero per cent at its next meetings in March or April.

Mr King explained: "Given that we are in such a deep recession in the short run, I think that if we were not to take measures to stimulate the economy, then savers would find they are actually much worse off – there would be even higher unemployment and even more of a downturn in the economy. That is the paradox of policy."

The Bank of England has cut the Bank Rate from 5 per cent to just 1 per cent in the past five months – and high street banks have responded by reducing the rates they offer savers.

Savings rates are now at their lowest ever level, according to the Bank of England's own records, with notice accounts offering an average of just 0.29 per cent and cash individual savings accounts (Isas) paying an average rate of 1.38 per cent.

Financial experts and charities warned lower rates will bring further misery to savers this year.

Sean Gardner, of the personal finance website MoneyExpert.com, said: "The Bank of England has tried to jump start the economy by slashing interest rates to previously unheard of lows. But these efforts come at a price and it's savers who have been sacrificed.

"Savers outnumber borrowers seven to one and it's the returns on their hard earned cash that will be crushed every day that the base rate stays so low."

Rebecca Ward, of the poverty charity Elizabeth Finn Care, said: "The latest interest rate reduction is a further kick in the teeth for people on low incomes who are struggling to eke out from their savings a life beyond mere subsistence survival."

Mr King's comments come as The Daily Telegraph calls for pensioners to be given a tax cut on the income earned from their savings and investments through its Justice for Pensioners campaign.

The Chancellor, Alistair Darling, has said he will look at measures to help these savers in the Budget, due in March or April.

Phil Jones, personal finance campaigner at consumer group Which?, said: "We've seen some very worrying data and savers will be very concerned. Banks cannot have their cake and eat it: if banks are not passing on cuts to borrowers they should not be passing on cuts to savers."

http://www.telegraph.co.uk/finance/personalfinance/savings/4592271/Mervyn-King-suggests-savers-will-be-sacrificed-as-rates-fall.html