It's the year of the saver

A string of rate rises could follow as one society tries to show it's good to be mutual. Steve Lodge reports

Competition for savers' cash is finally hotting up. In a move that could spark a new round of rate increases, the Bradford & Bingley building society will tomorrow raise rates across a range of accounts by up to 0.5 per cent, although the average rise is less than 0.25 per cent.

The increases follow the recent launch of Sainsbury's Bank, which is paying 5.75 per cent on balances of as little as pounds 1, and comes as savers with converting societies such as the Halifax are free to move their cash without jeopardising their windfalls.

Vicki Burn, of Moneyfacts, which monitors savings rates, says: "Rates are creeping up, although they're still pathetic. But the significance of this move is that it's not just about tweaking the odd tier or account."

The B&B says the move shows that a traditional building society can give better interest rates than a society that converts into a bank. It claims to offer rates that are generally at least 0.25 per cent better than any of the converters or the Abbey National. These and other improvements - it plans an announcement aimed at mortgage borrowers next month - will involve the return of pounds 100m in profits it would otherwise make over the next year. The B&B claims its "best buy" travel insurance policy (see page 19) is further evidence of the better deal available from mutuals. It insists it has no plans to follow the likes of the Halifax in changing status and offering a windfall.

Savers with four of the converters - the Halifax, Alliance & Leicester, Woolwich and Northern Rock - are now free to hunt for better rates. They must keep a membership account open to retain their windfall entitlement, but for many this will require no more than pounds 100 and even as little as pounds 1. Only bigger savers with the Bristol & West may need to top up their accounts again in June.

The combination of this money being freed up, new entrants to the savings market and generally rising interest rates - as well as less need for price-cutting on mortgages as the housing market strengthens - means savers can look forward to increased competition and better rates generally this year.

Base rates are expected to rise by between 0.75 and 1 per cent to as much as 7 per cent by the end of the year, and this could mean the return of accounts paying as much as 8 per cent for the biggest savers.

Rob Thomas, building society analyst at City bank UBS, says: "This is going to be the year of the saver."

The Nationwide building society - like the Bradford & Bingley an advocate of the benefits of remaining a mutual - is expected to announce rate increases to leapfrog those of the B&B, possibly as early as this week. It is currently running an advertising campaign aimed at savers with the converters, claiming they will get better rates by switching, and it has already attracted a quarter of a million new account openings.

But despite the claims of these mutual standard bearers to offer better rates, they are rarely the best, as our Best Savings Rates table on page 20 shows. Bigger gains can be obtained by hunting out particular accounts or switching account type - for example, from traditional instant access to a postal account.

Nevertheless, switching from the converters to one of the remaining building societies may still have its attractions. Many of these societies - whatever they may say in public - are also likely to yield windfalls in coming years, and if they want to pay better rates in the meantime then so much the better.

While many of the societies left may be too small to become banks in their own right, analysts say there is no shortage of potential buyers. Both the Birmingham Midshires and the Skipton are seen as likely to sell out before too long.