Life After Term Funding Scheme

Sep 19th 2017

Most UK savers are getting a raw deal, but who’s to blame? The ongoing low rate environment offers little relative value to savers and with banks continued access to cheap funding through financial markets, and in particular the Bank of England, the outlook is bleak.

But is all of that about to change? Recently, Bank of England Governor Mark Carney has called time on the Bank of England’s Term Funding Scheme which is due to finish in February 2018, ending a 6 year period where UK banks have accessed, and drawn to date, £82 billion of cheap long term funding to fuel growth.

With more funding expected in the short term, consumer savings rates could suffer further, but the question remains: Will the rate decrease witnessed in the recent past reverse and by how much? There’s a new equilibrium to be found between banks paying too much for deposits and the lending economics not working, and paying too little and savings balances going elsewhere.

Recent bond activity in the UK continues to show strong demand for Sterling Issuance with a number of recent transactions heavily oversubscribed. With the Term Funding Scheme ending we are likely to see a number of banks returning to the wholesale markets in 2018 albeit at a higher cost. This in turn could see an increase in depositor rates, but part of this demand will be dependent on the banks’ ability to grow their balance sheets in the wake of Brexit uncertainty and an economy showing signs of slowing.

In summary, inconsistency remains around available customer returns so it pays to shop around. Interest rates are also likely to become more volatile so timing will be of paramount importance to secure the best rate.