You can bank on a rate war

Halifax says it will pay 4% on its current accounts - but will the big four follow its lead?

If you are one of the 30 million people in this country with a current account, life just got better this week with the announcement of an account which will pay 40 times as much interest on credit balances as its high street rivals.

If you are one of the 30 million people in this country with a current account, life just got better this week with the announcement of an account which will pay 40 times as much interest on credit balances as its high street rivals.

Halifax, the UK's biggest mortgage bank, will start paying 4 per cent interest on credit balances from next January in an attempt to double its number of current account customers to 4 million people. The offer compares dramatically to the 0.1 per cent interest more than 80 per cent of current account customers currently receive from the four biggest banks on the high street.

Halifax's move will increase the pressure on the traditional banks, which are already facing competition from the raft of new internet and phone banks, some of which are paying even more than the Halifax rate.

Halifax's offer is open to anyone who puts £1,000 into their account every month, although the balance can fall below this sum. The former building society will also charge only 10 per cent on authorised overdrafts, which compares to about 18 per cent from most other current account providers. The offer also includes an interest-free buffer if you go £100 into the red.

However, while Halifax is gearing up for a flood of new customers, reactions to the news this week suggest that Lloyds TSB, HSBC, NatWest and Barclays, which between them control £26bn of current account deposits, will move rapidly to defend their market share.

A spokeswoman for Lloyds said: "We are not going to respond in a knee-jerk way but we are keeping a close eye on our interest rates and we want to remain competitive."

Consumers should also expect better rates from other providers. Like Halifax, Abbey National wants to double its current account customers and is expected to offer a range of new products in the next few weeks.

Other competitive current accounts are offered over the internet and by telephone. Smile's current account beats the new offer from Halifax, paying 4.85 per cent on balances from £1. First Direct offers internet customers rates up to 5 per cent. While these rates may be market-beating, Halifax's 4 per cent is so far the only deal of its kind that can be accessed through traditional high street branches.

The reason for the branch-based approach, Halifax said, was that some customers have been left behind by the banks' frenzy to set up online products. This includes the Halifax itself, which owns the much-delayed internet and telephone bank (Intelligent Finance, IF). However, it also has a network of 800 branches, through which the new current account will be accessed. James Crosby, chief executive of Halifax, has pledged to "bring some value back into high street traditional banking, where we believe three-quarters of customers still want to do their banking".

To encourage customers to swap to Halifax, Mr Crosby promised a "crack team" would be in place to make it as easy as possible to change banks. New customers will have to sign a note authorising Halifax's staff to contact their old bank. Halifax said it will then rearrange all of its new customer's direct debits and salary payments.

But, while Halifax has pledged to make the transfer as easy as possible, questions were raised this week about whether customers will be willing to go through the hassle of transferring. Mark Murphy, head of banking at Abbey National, said: "According to our research, only 5 per cent of people would be willing to switch bank for a better interest rate, and most people who think about switching are put off because they think it would be too complicated."

Despite Halifax's promises to make the process as easy as possible, other banks are not obliged to hand over details within a certain amount of time, which means transferring may take about six weeks.

Another potential reason not to transfer to Halifax is that consumers may be better putting their money into a savings account - with a higher rate of interest than Halifax's 4 per cent - and then transferring small amounts to a current account to pay bills. This can be done through accounts like Woolwich's Open Plan, which allows customers to switch money between its savings and current account free of charge. Interest on the savings account ranges from 5.25 to 6.25 per cent.

However, while there are other good deals out there, consumer groups have welcomed the new account from Halifax. Melanie Green, senior researcher for the consumer magazine Which?, said: "This will spark competition within the industry - the big high street banks are not going to want to see large chunks of their customers moving away."

She pointed out that Halifax may have succeeded in grabbing the headlines this week for championing beleaguered current account customers, but the picture is not entirely rosy. In an industry-wide survey this month by Which?, only 16 per cent of Halifax's existing current account customers said they would definitely choose the bank again.

"But maybe that was because they have not been offered a good account until now," she said.