Where are we now?
As widely anticipated, the Bank of England has raised rates from 1.25% to 1.75%. This is the largest single rate rise in 27 years.
This is the sixth recent rate rise from an all-time low of 0.10% in 2020. This is the first back-to-back increase since 2004.
As a sense of perspective, the pre-covid base rate was 0.75%.
Expectations of interest rates going forward
The next MPC meeting is on the 15th September. Insignis expects 2 more rate increases this year to take the Bank of England base rate to 2.25%.
We then expect further rate rises in 2023 with the base rate peaking at 2.5%, before then being reduced to a “normalised” 2% from 2024 onwards.
Are bank savings rates expected to increase?
The overall direction of travel is that available savings rates are increasing.
Bank by bank, each bank will decide for themselves on whether and when to pass on each rate rise. Some banks have passed on the recent rate rises in full, others have passed it on in part and there are also a small number who have not passed on any of the rate rise.
It is worth noting that savings and deposit rates have already seen significant increases over the past 6 months, particularly from challenger banks. For example, since December 2021 our best easy access account has increased by nearly 200% to 1.75% and our best 1-year rate has increased by approx. 100% to 2.85%.
It is not just “whether” rates are rising but “why”
It is critical at the outset to clarify that interest rates rise for two reasons:
- A strong economy causes prices and wages to rise, leading to inflation which needs to be managed via rising interest rates.
- External factors causing price rises, such as supply chains or energy and raw material prices result in the central banks needing to raise interest rates to combat higher inflation.
The combination of the above two factors (the Rate Rise Rationale or “RRR”) is key in any economy in determining which sectors and companies will benefit from a change in the interest rate cycle. This is especially true for Fintechs as the financial sector is highly leveraged to the interest rate cycle, more than other sectors.
The Bank of England forecasts average pay settlements to increase by 6% over the next 12 months.
These two simple data points provide the key to watching “external” inflation become endemic or “internal” within the United Kingdom.
How can Insignis help?
The savings account rates available from certain banks are still as low as 0.45%. Using Insignis will ensure 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.
Insignis works with a panel of 35 banks and building societies, providing access to market-leading rates in addition to the comfort often associated with the high-street banks your Clients are familiar with. We constantly monitor the rate environment and are proactive in communicating new rates to Clients.
To find out how your client could be earning more on their cash deposits, request an illustration today at email@example.com