BSA chief attacks 'savage' interest rate cuts

Published on Wednesday 20 May 2009 21:45

BANK of England policymakers will come under fire today for the "savage" interest rate cuts that they have sanctioned since October.

The Building Societies Association will say that the monetary policy committee had been wrong to reduce interest rates so sharply, slashing them from 5 per cent in October to a record low of 0.5 per cent in March.

BSA chairman John Goodfellow is expected to tell the body's annual conference that many societies were sympathetic to the plight of their savers, particularly elderly people who had seen returns on their deposits rapidly plummeting towards zero.

Goodfellow is planning to say: "We also questioned whether this policy would benefit the mortgage market or, rather, restrict the flow of funds available for mortgage lending even more than was likely to be the case as a result of other developments in the economy. In our view the interest rate cutting policy did not have to be quite so savage."

The conference will also hear that there was considerable anger among mutuals at the "disproportionate" Financial Services Compensation Scheme (FSCS) levy imposed on building societies. The FSCS pays redress to people who lose money when a financial institution collapses, and it has recently compensated savers of internet bank Icesave, Kaupthing Singer & Friedlander and Bradford & Bingley.

The scheme is funded through a levy on all financial institutions, but the amount paid by deposit takers is based on the level of consumer funds that they hold, rather than the risk of them collapsing.

The BSA argues that this approach is unfair on building societies, as the sector tends to step in and help other mutuals that run into difficulties. Building societies have generally weathered the credit crunch better than banks, although there has been a wave of consolidation.