ST: Savers may have to pay banks next, experts warn

[g8crasher]

Savers may have to pay banks next, experts warn

By Lee Su Shyan, Assistant Money Editor

Low bank deposit rates for savings are not the bane of Singapore account holders alone. Savers worldwide suspect they might as well put their money under the mattress or in a piggy bank.

The Straits Times recently reported that banks in Taiwan were turning away big depositors. The No. 1 bank in Taiwan, Chunghwa Post, said that it would not be accepting fixed deposits from corporate clients as it was focusing on individuals.

With Taiwan's central bank cutting rates, interest rates at private banks have slumped. The post office is offering 0.29 per cent for one-month deposits compared to 0.1 per cent at private banks.

In Britain, 100,000 pounds (S$230,000) will earn a meagre 290 pounds or so in interest a year from a standard deposit account, the Daily Telegraph reported. And that is before tax.

It is a similar story in many other countries. The reason? Central banks around the world are trying to stimulate flat-lining economies by offering ultra-cheap credit. But the low interest rates for borrowers translate to low interest rates for depositors too.

According to OCBC Bank economist Selena Ling: 'Governments want to kick-start lending after the credit crunch. They also want to stimulate the economy.'

The US Federal Reserve's key interest rate is now between 0 per cent and 0.25 per cent while the Bank of England has now cut rates to 0.5 per cent.

In Britain, with some accounts paying just 0.13 per cent on some types of accounts, rates are now possibly the lowest on record. Many savers are having to come to terms with the fact that low interest rates are here to stay.

In Britain, Mr Andrew Barker, Skipton Financial Services' chief operating officer, was quoted by The Daily Telegraph as saying: 'Most now realise that this is unlikely to be a temporary blip, and it will be a year or more before savings rates are likely to rise.'

In fact, some financial experts are even warning that the next trend will be for savers to actually start paying banks for the service of holding their cash.

Ms Michelle Slade, a spokesman for personal finance website Moneyfacts, said: 'The average rates from the Bank of England make grim reading for savers. It is quite possible that banks may now start charging savers to look after and manage their accounts.'

In the United States, it is a similar tale. Rates are generally low but US national bank CapitalOne, for example, is offering 1.01 per cent for amounts under US$10,000 (S$16,600). The interest rate goes up to 2.01 per cent for amounts above US$10,000.

The catch? This is an online account. Bank statements are issued electronically, saving postage and printing costs, which explains why they are able to offer better rates.

But if the customer fails to meet certain conditions in a given month, interest rates will fall.Caveats range from customers being asked to use additional banking services, or stipulating the number of debit and credit transactions a month the customer must make.

Another reason that some accounts are offering rates as much as 4 per cent is the need for the banks to raise capital amid the global credit crunch. The Orlando Business Journal quoted Mr Greg McBride, a senior financial analyst with Bankrate.com, which publishes rates for hundreds of financial institutions, as saying that US banks are trying to boost reserves and cover loan-loss write-downs.

He said that 'with the credit crunch, it's still cheaper to pay 4 per cent on deposits than to tap the credit markets' to borrow capital from other institutions.

While these rates may sound attractive, there has been a high failure rate among the smaller US banks, and investors have to check if their bank deposits are covered by the Federal Deposit Insurance Corporation.

Perhaps savers can head to Australia, where the official interest rate is 3.25 per cent. While the lowest for 45 years, it is still higher than in Japan, Europe, and the US.

Asian currency and rates strategist Patrick Bennett from French bank Societe-Generale said: 'Investors should not be too discouraged by the low rates as it signals that central banks and policy makers are injecting capital into the bank to stave off deflation.'

He added: 'Interest rates do not tell the whole story. If price deflation or the rate of fall is 2 per cent and interest rates are 1 per cent, actually, the saver has gained by 3 per cent.'

This article was first published in The Straits Times.

http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20090316-128798.html