Bank of Ireland rate cut hits small savers' returns

The sharp drop in returns for savers as interest rates fall has been highlighted by an interest rate reduction at Bank of Ireland. The bank has cut its interest rates on loans and savings, with mortgage rates falling by 0.75 of a percentage point, and deposit rates dropping by up to one percentage point.

The expected rate reduction is good news for its mortgage holders and borrowers but small savers are now facing low returns on their funds, following significant reductions in deposit rates. Bank of Ireland is reducing its standard variable mortgage rate by 0.75 of a percentage point to 6.65 per cent. For customers with a mortgage of £40,000 over 20 years, the rate cut will mean savings of £18 a month. Those with mortgages of £60,000 will see monthly savings of £27, while the monthly repayments on an £80,000 mortgage reduces by £36.

Meanwhile, the bank's savers will see a reduction in deposit rates of between 0.25 of a percentage point and 1 point, depending on the type of account held. Customers with up to £100,000 in their account will now receive a rate of just 0.375 per cent, a fall of between 0.25 of a point and 0.5 of a point, depending on the amount saved.

Those with savings of over £100,000 will attract an interest rate of 0.5 per cent. The bank's older Golden Years customers will see the interest rate on their savings reduced from 1 per cent to 0.625 per cent.

Interest rates on its reserve deposits - accounts requiring notice of withdrawal - will continue to be more attractive, but will be substantially reduced. Savers with these accounts with up to £10,000 will be paid a new rate of 2.25 per cent, a drop of one point, while accounts with between £50,000 and £100,000 will attract an interest rate of 4 per cent, a reduction of 0.5 of a percentage point. Meanwhile, as well as the drop in mortgage rates, other savings rates are also falling.

The rate of interest charged on Bank of Ireland's personal overdraft facilities and loans is being reduced by 0.5 of a percentage point to 11 per cent. Business customers will also benefit from the rate cuts, with business overdraft rates down to 9.575 per cent, a reduction of 0.875 of a percentage point, and the cost of other business loans falling by 0.75 of a percentage point.

The new interest rates apply from close of business tomorrow. The rate cut follows the Central Bank reduction in its key interest rates by 1.25 per cent to 4.94 per cent last week.

National Irish Bank and Irish Permanent have already passed on the reductions in lower mortgage and loan rates but have yet to reduce savings rates.

The other major institutions are still monitoring their interest rates but more are expected to follow Bank of Ireland announcing lower rates over the coming days.

The Central Bank will have to further reduce its key lending rates before the end of the year, and is expected to announce one or two more cuts bringing its base money market interest rates down to around 3.3 per cent in preparation for the introduction of the euro in January.

Some of the banks and building societies would prefer to wait to pass on the full reduction in rates to customers and avoid piecemeal reductions which are most costly for them to implement.

But most will now have to adjust their rates to maintain competitiveness in the aggressive mortgage market.