Saving rates: inertia rules ok?

Liseth Galvis - 15 November 2017

For the UK’s 22 million beleagured savers, the Bank of England’s Bank Rate increase from 0.25 to 0.5 per cent has been a long time coming. However, for those waiting in eager anticipation of an improvement in their deposit rates, the disappointment is not over. According to Moneyfacts, just 20 out of some 100 providers has lifted interest rates on their savings products since the Bank’s announcement, and not all of these will pass on the full 0.25 per cent increase. For example, Barclays, Halifax and Lloyds have not decided if they will implement the increase. Among the larger names, only National Savings & Investments (NS&I) and Coventry Building Society have passed the increase to their savers.

Ultimately, banks have discretion in the extent to which they pass on changes in the Bank of England base rate of interest. Publicly, Mark Carney and Theresa May are putting moral pressure on financial institutions to pass on the benefit to savers just as swiftly as they transmitted past cuts to their depositors. For example, in August 2016 ( figure 1) when the Bank of England reduced the base rate of interest by 25 basis points and consequently financial institutions decreased the interest rate access deposits from households from 0.28 percent to 0.15 per cent between August and December 2016.

According to the Financial Conduct Authority (FCA), in a well functioning market “providers should be competing to offer the best possible deal to consumers”. However, following the recent increase of the Bank of England there are more institutions reviewing than effectively increasing their customers’ rates. To raise awareness of the importance of offering attractive savings rates that reflect market conditions, in the Sunlight Remedy report (2016) the FCA named and shamed the worst saving accounts paying interest to encourage consumers to switch away from providers offering low-interest saving products. 

Banks have incentives to transmit increases in Bank Rate to credit products more quickly than for saving products. After the announcement on 2 November, Barclays, Halifax and Lloyds announced an immediate increase of 0.25 per cent to tracker and Standard Variable Rate (SVR) mortgages, in contrast to the mere review of their saving rates.

Ultimately, the UK consumer banking market is relatively uncompetitive. Current account switching rates, from one bank to another, are very low. With consumers so inert, banks can get away with increasing lending costs while holding saving rates steady. Indeed, it’s completely rational for them to carry on doing so, given the minimal loss of deposits that they suffer.


Figure 1

Source: Bank of England



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