Less saving, more borrowing likely as inflation stays high

The news for savers is only slightly better than for borrowers. Many people, particularly those on fixed incomes, have seen their earnings eroded greatly over the past few years. In contrast to the speed with which borrowers feel the effect of rate rises, few savers see the full benefit of rate rises being passed on.

Higher inflation is also taking its toll and interest rates are likely to stay negative - i.e. inflation is likely to be higher than the return on money for some time to come. That is a scenario which can only encourage people to save less and borrow more.

According to Dr Dan McLaughlin, chief economist at ABN Amro, the Government should look at withholding tax on savings accounts if the savings ratio is not to fall to a problem ratio. Withholding tax, he points out, was brought in to protect the currency following the abolition of exchange controls.

According to Dr McLaughlin it has little relevance now, particularly if the Government wants to boost savings.

However, privately lenders say that the interest rate has little impact on short-term savings. If people are saving for a deposit or simply for a holiday or a rainy day the level of interest rate seems to have little impact, they insist.