A surprise before Christmas but a Happy New Year?
Yesterday the MPC voted 8-1 to increase interest rates for the first time in more than three years, from the pandemic-driven low of 0.10% to 0.25%.
Despite the economic impact of the omicron variant remaining relatively unknown, the threat of surging inflation was deemed too significant to ignore. Inflation was at 5.1% for the year to November, well above the Bank of England’s 2% target, and it is expected to peak at 6% in April 2022.
But what will this mean for savers?
Following a base rate rise announcement under “normal circumstances”, we would expect to see a flurry of action from Banks and notably an increase in deposit savings rates. The base rate determines the interest rate the Bank of England pays to commercial banks on the deposits banks place with them. Hence, when the base rate rises, commercial banks benefit from increases in interest income on their deposits with the Bank of England and traditionally banks have passed this on to savers, albeit at varying levels.
However, we are not in “normal” circumstances. From a short-term perspective, we are two weeks away from the financial year end for the majority of banks and it is likely they will not seek new funding until the new year.
In the medium-term, however, as Banks seek deposits in the new year to fund lending initiatives, an increase in rates may be plausible. While this may be a small increase among the high street banks, this may be more fully passed on by a broader range of challenger banks.
It is also important to stress that the base rate forms only one, albeit significant, influence on savings rates. There are a further 10 new challenger banks due to enter the market in the next 12 months, so rates are likely to increase irrespective of changes to base rate as these competitors strengthen the competition for deposits.
Overall, in the short-term we do not expect an immediate flurry of saving rate increases as a result of the announcement. However, if this base rate change represents a “watershed” for further rate hikes in the new year, as many expect, we may have a “happy new year” for savers with widespread saving rate increases in throughout 2022.
How can Insignis help?
The current account rates available from high-street banks are still as low as 0.01%. Using the Insignis Cash Management platform will ensure you or your clients are maximising returns on their cash holdings, whilst simultaneously reducing risk as their funds are diversified across several institutions, maximising FSCS protection eligibility.
Find out more
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