Bank of England decisions used by banks to increase margins

Most banks and building societies have been using Bank of England decisions to reduce interest rates as an excuse to cut credit interest, but they have failed to do likewise with overdraft rates.

With virtually every household in the UK having a current account, any decision involving them has a huge impact on the nation's wellbeing. Analysis by price comparison site moneysupermarket.com shows current account interest has fallen by 1.29 per cent since February, yet overdraft rates have risen by an average of 1.11 per cent.

Kevin Mountford, head of banking at moneysupermarket.com, said: "The average difference between the in-credit rate and the overdraft rate is now at an alarming 9.64 per cent, 2.4 per cent more than in February.

"It's fair enough that the average in-credit rate among the leading providers' main accounts has dropped by 1.29 per cent, noting where we are with the base rate, but overdrafts should have fallen by a similar amount. To see overdrafts rise by 1.11 per cent over the same period has the banks effectively charging 2.4 per cent more on overdrafts than they should.

"With £600 million outstanding in overdrafts, that equates to a £14.4 million Christmas present for the banks.

"The wide discrepancy between in-credit and overdraft rates is hard to justify, and the way some banks have used base rate cuts to widen the margin is very disappointing."

Halifax has made the biggest move to the detriment of its customers since February. Its interest rate has plunged from 6.17 to 2.5 per cent while its overdraft has risen by 3.6 per cent.

Kevin Mountford continued: "Halifax was the main driver in challenging the big banks on credit interest, so it is sad to see it succumbing.

"At one end of the scale we now have two main providers offering a higher rate on in-credit balances than on its overdrafts - while at the other end we have three charging over 19 per cent on their overdrafts.

"The announcement today from Alliance & Leicester that it is dropping its headline rate from 8.5 per cent to 6.5 per cent is no surprise. Its Santander stablemate Abbey had cut by a similar amount to six per cent earlier in the week, but it's good to see them both still offering zero per cent overdrafts in the first year.

"Yesterday's Bank Of England decision to slash another one per cent off official interest rates could be an opportunity for many banks to cash in again.

"Let's hope this time the story will be different, but with the pressure on mortgages and savings and the OFT court case hanging over the banks these institutions have to recover margin somewhere."