One in five savings accounts will pay less than 1% if this month’s rate cut is passed on in full, with many getting close to zero.

The Bank of England is expected to slash rates further after its November inflation report raised the spectre of deflation — a damaging spiral of falling prices that has kept the Japanese economy in the doldrums for nearly two decades.

Few economists expect the situation in Britain to get as bad as in Japan, although even a short period of falling prices would be hard for the economy: consumers won’t spend and will get little reward for saving.

The Bank’s inflation report showed the consumer prices index, the government’s preferred measure of inflation, falling from 5.2% to just 1% in 2010, with a 20% chance that it will fall below zero.

John Higgins of the consultancy Capital Economics said: “Deflation is not always bad news. It is important to distinguish between a relatively short period of negative inflation due to the unwinding of a commodity-price shock, and a more sustained period of generally falling prices and wages that can result from a debt deflationary spiral. For now we only expect the first.”

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Banks and building societies have been slow to react to this month’s 1.5 percentage point cut in Bank rate, with mostly tracker savings deals having fallen so far. Lloyds, for example, cut rates on its Easy Saver 2010 by 1.5 points from November 6, even though its mortgage trackers do not drop until next month.

Meanwhile, Kaupthing Edge savers, whose accounts are now owned by ING, are earning just 4.55% on variable accounts compared with 6.55% when their accounts were transferred over.

The average rate on a no-notice account with a £50,000 balance is just 3.44% before November’s cut. If the reduction is passed on in full, the average will drop to 1.94% with 20% of accounts paying less than 1%, said data firm Moneyfacts.

Halifax’s popular Liquid Gold account already pays only 0.25% and the bank hasn’t decided what to do following November’s move — it said there was nothing to stop it cutting the rate to zero.

Japan’s experience gives us some clues. “Savings rates on bank deposits never went negative, but they did in effect disappear — rates were as close to zero as makes no difference,” said Robert Brook of SG Asset Management.

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