Is there light at the end of the tunnel? by Giles Hutson – CEO

Feb 16th 2017

An outlook for the savings market.

In the summer of 2016, the Bank of England cut rates as a pre-emptive strike against the Brexit fallout. This was swiftly followed by rate cuts across the board in savings products from the majority of the banking industry. As we begin to build a picture for 2017, is there any light at the end of a long and brutal tunnel for the savings community?

Savings rates are driven by four main paradigms:

  • Competition within the banking sector
  • Economic growth and the corresponding demand for consumer finance, housing finance and corporate credit
  • Individual and corporate inertia
  • Monetary environment

Competition in the Banking Industry
Believe it or not, there are 156 banks incorporated in the UK. We expect to see at least 20 new banks join the market in 2017. The market is significantly healthier and more competitive than most people realise and the best savings rates are often from the non-high street banks.

Economic Growth
We are now unlikely to see short term shock due to Brexit but we will see reduced growth figures for the foreseeable future.  The fundamentals of the UK economy in terms of employment and growth remain strong but the direction of travel is less encouraging.
Saver’s Inertia
A combination of new entrants to the banking market with the benefits of FSCS protection (just raised from £75,000 to £85,000), provide all the tools necessary to improve returns and reduce risk. However, inertia levels are high and active cash management has not yet permeated into the UK saver psychology as it has in other countries. The irony is that just when inflation is beginning to materially damage savings portfolios there is still a sense of whether the time and effort is worth it. Savers need to think longer term and realise that with the current level of inflation, every pound will be worth 17% less in 10 years’ time.

Monetary Environment
The heart of the problem for savers lies in what has been termed financial repression.  There is an increasing body of opinion that endless liquidity (via Quantitative Easing, Funding for Lending, the Term Funding Scheme, etc.) designed to drive down long term interest rates may actually be doing more harm than good. While banks can borrow extensively and long term from the Central Bank at 0.25%, there is little incentive for them to attract new savers to their institutions with savings products at higher levels.

If there is one single step that can be taken to help the savings community then the phased withdrawal of this glut of Central Bank excess liquidity would be the place to start.   

To summarise, savers remain in a tough spot but the FSCS protection combined with increased competition means that if savers make positive steps to invest their savings and get over the inertia, then the risks of the pound in our pocket being 17% less valuable in 10 years time can be mitigated.