Santander is slashing the interest rate on its flagship current account to a tenth of what it once was.
From April 12, the in-credit interest rate on its 123 current account on balances up to £20,000 will halve from 0.6% currently to 0.3%.
The bank used to pay as much as 3% interest on its 123 deal – making it popular with savers looking for decent returns in the low interest rate environment.
The 3% rate was halved to 1.5% in November 2016.
The rate was then cut twice in 2020, as interest rates generally tumbled during the coronavirus crisis – from 1.5% to 1% in May and then from 1% to 0.6% in August.
Santander said the latest rate reduction to 0.3% will still give customers of its 123, Select and Private current accounts up to £59.92 interest on a balance of £20,000 for a full year.
The bank will also be reducing the fee on its 123, Select and Private current accounts from £5 to £4 per month. This means customers will pay £48 per year, which is £12 less than previously.
There will be no changes made to cashback benefits the accounts provide on household bills, meaning customers can earn a maximum of £240 per year in interest and cashback combined.
Santander said it will contact all customers over the next month to explain the changes – including a “small number” who may end up paying more for their account than they earn on it.
They will be provided with alternative accounts, such as the 123 Lite current account, which offers the same cashback on household bills as the 123 current account, for a lower fee of £2 per month, or the Everyday current account, which has no fee but does not offer interest or cashback on household bills.
Susan Allen, chief executive , retail and business banking at Santander, said: “With the Bank of England base rate remaining at its lowest level on record, and significant recent reductions in interest rates on current and savings accounts across the industry, we have taken the difficult decision to reduce the interest rate on our 123, Select and Private current accounts.
“However, by lowering the monthly fee, we’ve ensured the accounts continue to provide customers with long-term, everyday value.”
Santander is not the only savings provider to have recently announced rate cuts, as savers’ returns generally have been squashed in recent months.
In November, savings giant NS&I announced various rate reductions, including for variable rate products and some fixed-term products. The Premium Bonds prize fund rate was also reduced.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said of Santander’s announcement: “This will be disappointing news for those consumers who use high interest current accounts to earn a competitive return on their cash.
“Customers will now need to consider carefully if the monthly fee and cashback offer if still the best choice for them in light of the credit interest rate cut as there are alternative accounts on the market paying a higher credit interest rate.
“There is no telling how long a provider can sustain a lucrative package so it would not be too surprising to see other brands review their interest rates in the current environment.”
Looking at other potential deals available, Ms Springall highlighted an account from Virgin Money which pays 2.02% interest on balances up to £1,000.
Nationwide Building Society also has an account which pays 2% interest on balances up to £1,500 for the first 12 months, and a variable rate of 0.25% after the initial period.