BoE admits savers could face charges for savings

Tuesday 24th March 2009

The governor of the Bank of England Mervyn King has admitted banks may have to start charging customers for holding deposits as interest rates drop.

Speaking the House of Commons Treasury committee this morning, Mr King explained low interest rates may lead high street banks to seek new ways to maintain profits.

"Banks will want to raise the question [of charging customers] if interest rates are on such a low level," he said, explaining the basis on which they make a return from the difference between saving and lending rates is reduced.

He added banks could start charges, but it was a matter not for banks themselves and regulators, but not the Bank of England, which has cut the base rate down to a record low of 0.5 per cent.

Mr King also admitted to a "paradox of policy" over the long-term need to encourage savings in the UK, with the short-term needs of the economy for greater spending.

"Once we are through the immediate problem, there will be a need to increase the national savings rates," he said.

Turning to the economy and inflation, which reported a surprise increase today, Mr King said: "Biggest concern I have is the state of the world economy… it is the biggest downside risk facing us in the coming years."

He added the Bank needed to maintain its inflation target as the monetary policy committee (MPC) starts its policy of buying assets on the markets as a part of quantitative easing.

"It is most important we stick to close target. That is the anchor everyone must hold on to," he said.

"We are trying to bring the future outlook back up to target. We have no interest in seeing interest rising above that."

Mr King also told MPs: "In six months' time we will be able to look back and see… impact of initial [quantitative easing] operations.

"We would aim to do £75 billion in three months. We might need to do less if it works," he explained, pointing to the US Federal Reserve's own success.

The governor of the Bank of England, however, was confident of a recovery for the UK and global economy.

"There will be a recovery in the UK...The precise timing and degree of strength are hard to judge," he told MPs.

He explained it was hard to judge as it was uncertain when banks would start to recover.

Mr King also warned against further fiscal stimulus for the economy.

"We are facing very large fiscal deficit, there is no doubt," he said.

He explained large scale tax cuts should not go ahead, but small scale targeted fiscal stimulus could.

"We can do more monetary easing, monetary policy should bear the brunt," he said.

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