Natwest have become the latest bank to slash interest rates on their cash ISAs in the wake of the Bank of England’s decision to lower rates earlier this month.
Interest rates at the bank have been cut to minimal levels; those with savings between £1 and £24,999 will see rates fall from 0.25 percent to just 0.01 percent, the equivalent to £1 interest on every £10,000 in savings.
For those with savings between £25,000 and £49,999, the cuts will come as even more of a blow – interest rates will be cut from 0.50 percent to 0.05 percent. The rate changes will come into force on the 31st October 2016.
Cash ISAs were designed to encourage savers to keep money in the bank tax-free, but for many, the cuts will mean there is simply no incentive to put money in an ISA.
Interest rates have been on a downward spiral for some years, but are likely to sink even lower after the Bank of England’s decision to reduce the Base Rate to counteract volatility in the wake of Brexit. Other banks have already cut rates on their savings accounts; Barclays have cut their Everyday Saver down to 0.25 percent and Santander will be putting their Everyday Saver rate down to 0.1 percent in November.
Given the current uncertainty over the UK’s economic future, interest rates may not have hit rock bottom yet. Just days after the base rate was cut, Natwest became one of the first banks to warn that negative interest rates may be introduced – effectively meaning customers would be paying Natwest to keep their money in their account. Negative rates are a monetary tool used to discourage savers from keeping their money in the bank and spend it instead, therefore propping up the economy.
Investment giant Capital Group have widely criticised negative interest rates, saying in a White Paper that, “The approach, in theory, should boost inflation and economic growth as the money is ultimately put to use by businesses and consumers. In reality, however, it doesn’t necessarily work that way.”
“These policies penalise savers, robbing them of the income they need from savings, and direct capital to what may be unproductive areas of the economy,” said fund manager David Hoag.
“For economies to function normally, they need positive interest rates and they need capital to be allocated efficiently.”