A paradox sits at the heart of the UK and developed world economies during the current interest rate cycle, as the cost of borrowing is rising in leaps while the rewards for savers are only inching up.
The bosses of the UK's four largest banks are set to face a public grilling on the divergence when a group of MPs pose questions over the rates they give to their savers, on Tuesday.
The chief executive of Lloyds, Charlie Nunn, HSBC UK boss Ian Stuart, NatWest Bank's chief executive, Alison Rose and Barclays UK boss Matt Hammerstein are all set to attend the hearing held by the powerful Treasury Select Committee.
“Public scrutiny of our largest financial institutions is vital. We look forward to hearing their views on a variety of topics, including savings rates, the outlook for the mortgage market, bank branch closures and changes to financial services regulations,” said Harriett Baldwin, the chair of the Treasury Committee.
For the tenth consecutive time, the Bank of England raised interest rates last week — interest rates in the UK have gone from 0.1 per cent in late 2021 to 4 per cent currently.
Pass it on
The banking industry as a whole is often criticised for passing too little of the rate rises on to customers with savings accounts.
Net interest margins, which is the difference between what bank's charge borrowers and the rates they give depositors have been climbing over the past year. Charging borrowers more than savers is the basic premise of how banks everywhere make their profits.
“While mortgage rates have shot up, savings rates haven’t risen by nearly as much and some banks are worse than others for pocketing the difference rather than boosting savings rates,” Laura Suter, Head of Personal Finance at AJ Bell told The National.
“Banks make money on the difference between what they charge those borrowing money and what they hand over to savers — the bigger the difference, the bigger the profits.”
But the rates on UK savings accounts vary tremendously, and depend not just on the Bank of England's base rates, but also on the length of time that savers are willing to tie up their money for and the amounts involved.
In addition, savers can also consider bonds that pay a fixed rate of interest rate but restrict access to the money for periods usually between one and five years.
Money experts are encouraging savers to shop around, after many years when interest rates were so low it was barely worth bothering.
For example, the online bank First Direct is offering a rate of 7 per cent on one of their savings accounts, but there are restrictions on how much can be saved per month (a minimum of £25 and a maximum of £300).
Meanwhile, in response to the Bank of England's rate hike last week, the government-backed National Savings and Investments (NS&I) relaunched its one-year fixed rate Guaranteed Growth Bonds with an interest rate of 4 per cent.
“We’ve seen the interest rates offered by the big high street banks inching up slowly in recent months but moves have only really been marginal — they aren’t under any obligation to pass interest rate increases on to their customers, so many have only done so in part,” said Helen Morrissey, senior analyst at Hargreaves Lansdown.
“In the current environment, the onus is very much on the saver to seek out higher rates and there are better deals out there. Smaller banks often offering online accounts are offering up to 3 per cent but it’s important to check if there are any restrictions before signing up,” she added.
Stashed cash and savings war
Some analysts point out that the big UK banks don't pass on base rate rise in full to savers for one simple reason: they don't need to.
Many people stashed cash away during the low-rate pandemic years and this money is still languishing in savings accounts that pay little in the way of interest, meaning that the banks don't have to worry so much about getting new business and, therefore, don't need to offer competitive rates.
“Lots of people stashed away cash during the pandemic and many are still sitting on these cash pots, often in their current account or in old savings accounts paying very little interest,” Laura Suter at AJ Bell told The National.
“It means a lot of high-street banks don’t need to raise their savings rates to attract more business, as they have enough of the nation’s savings anyway. Until savers vote with their feet and move their money to accounts with better rates, these big brand names don’t need to offer savers more attractive deals.”
“We’re now starting to see signs of people moving money out of these accounts with minimal interest and into fixed-term accounts paying far higher rates, but not enough to move the needle for the big banks.”
However, what could move the needle for the big banks would be a savings war, where competition for customers' cash starts to increase dramatically.
At 4 per cent, UK interest rates are now at their highest level for 14 years and there are those who think they should rise further to tame double-digit inflation.
On Monday, Catherine Mann, who sits on the Bank of England's rate-setting Monetary Policy Committee, urged her colleagues to continue to vote for rate rises.
“The consequences of under tightening far outweigh, in my opinion, the alternative,” she said.
“We need to stay the course and in my view the next step in bank rate is still more likely to be another hike than a cut or hold.”
Further interest rate rises are likely to incentivise more latent savers to move to higher rate accounts, which would spark a savings war — a battle that Ms Suter at AJ Bell told The National was already showing signs of happening.
“The latest Bank of England figures show that in the final two months of 2022 savers took £7.7 billon out of easy-access accounts paying little or no interest and at the same time funnelled £17.3 billon into fixed rate accounts, where rates have shot up,” she said.
It would also appear that the 'pandemic cash' saved by people who were prevented for spending it on hospitality, leisure and tourism during the lockdowns in the UK, is being eyed up by the government.
The Treasury is considering a large increase in the bonds it sells to retail investors, a move that analysts say may draw inasmuch as £70 billion for financing deficits in the coming years.
“There is plenty of cash in the household sector in the UK that could potentially be put to work in other ways,” said Imogen Bachra, head of UK rates strategy at NatWest Markets.
“Preparing for a wave of defaults”
However, even given the fact that savings rates are rising and are set to rise further, especially if the savings war really hots up, MPs on the Treasury Select Committee are unlikely to give the bank bosses an easy time on Tuesday, despite the fact that half of the Conservative members on the committee have worked in finance and banking.
Indeed, the meeting of the Committee comes a week before the big banks releases their latest profit figures.
According to analysts' predictions, NatWest, which is 45 per cent owned by UK taxpayers, will post a 34 per cent rise in operating profits to £5.1 billion for 2022. If so, that would be the bank's best performance since the 2008 financial crisis, when it received a £45.5 billion from the UK government.
The Committee said last week that it may want to look at the issue of too little, too late when it comes to passing on Bank of England rate increases to savers and ask whether the banks are deliberate feeding net interest margins.
Some watchers say this is just good business sense, especially as the UK banking sector gears up for what could be a difficult year ahead.
“Understandably, banks are also concerned about what’s coming in the rest of the year. A recession means people losing their jobs, which in turn means more people defaulting on their mortgage or other debt, which is a cost for banks,” Laura Suter told The National..
“On top of that, a similar trend will be seen in the commercial market, with businesses defaulting on loans. Many banks are preparing for a wave of defaults and trying to shore up their balance sheets in anticipation.”