The need to pass on rate cuts to those on variable rate loans while maintaining interest rates on savings accounts in order to keep money on deposit, is squeezing banks’ profit margins, according to analysts.

Adrian Coles, director-general of the Building Societies Association, said that the benefit of yesterday’s rate cut to borrowers was unlikely to be equal that of the loss to savers, leading to a reduction in the amount available to extend in new loans.

Coles described the cut to 0.5% as 'a kick in the teeth for savers who will see their already diminished interest payments fall even further'.

'It will also harm the aspirations of the many people who are finding it difficult to get a mortgage, particularly first-time buyers with relatively small deposits. Lower interest rates reduce the incentive to save, and in turn, this limits the flow of funds into the mortgage market.'

Some economists suggest that the banks’ concern about savers is likely to mask their concerns about profitability at a time when banks are having to dig into profits to set aside additional reserves for loan losses.

Financial Times