Tumbling rates may bring end to free banking

The future of free banking was in fresh doubt today as historically low interest rates threatened bank profits.

High Street banks could start charging customers to have accounts in a bid to recoup falling profits related to lower rates.

The Bank of England has cut rates from 5% to an all-time low of 1% since October and was expected to act again today.

Banks make profits through their "interest rate margin" - the difference between their deposit and lending rates which covers the cost of providing a service.

They tend to set deposit rates a little below the official rate set by the Bank. Once deposit rates hit zero, further falls in lending rates reduce profits.

The Bank's monetary policy committee is concerned the lower returns enjoyed by banks will cause them to restrict lending further and starve the economy of much needed credit.

One solution for the banks could be to scrap free banking and charge customers.

"There is a case for bringing down interest rates to zero, or close to zero, as soon as possible to boost the economy," said Howard Archer of Global Insight.

The end to free banking came a step closer last week when Britain's biggest banks lost their appeal against a decision allowing the Office of Fair Trading to decide whether or not charges on unauthorised overdrafts are fair.

The expected cut in interest rates today came as economists at PricewaterhouseCoopers predicted gross domestic product will fall 5% this year - far worse than the Treasury forecast but in tune with thinking at the Bank.

The PwC report predicted the recession will last throughout 2009 and into 2010 as a result of rising unemployment, falling house prices, a lack of credit availability and a collapse in world demand.