This month, an influential committee of MPs ordered the biggest UK banks to “step up their game” after they found that cash savers were only receiving as long as 0.25% AER in some saving accounts, despite the Bank of England’s 12 consecutive base rate hikes to 4.5%.
This comes after at least eight banks and building societies in the UK were openly criticised by the Treasury Committee when its members claimed the financial institutions had been short-changing savers after failing to pass on higher interest rates to their customers, especially on their easy access accounts.
At the time, HSBC replied to the Treasury Committee: “Our strategy is to help our customers budget and save better for the long-term. With that in mind, we have developed a broad suite of savings products to support different goals. These offer a range of different interest rates which allow customers differing degrees of flexibility in accessing their savings. All of these products have seen multiple interest rate increases in the last year.”
Lloyds, meanwhile, stated in its letter that to suggest that the bank relied on customer reluctance to switch to increase profits “is simply wrong”.
With the Bank of England now expected to continue with its hawkish monetary policy until 2025 (last week was a “shock” increase of 0.5bps to 5%), Insignis Cash looked at the realities between interest rates hikes and banks’ savings rates offerings, as more customers are encouraged to shop around.
Retail Easy Access VS Base Rate
Using internal research, we looked at the number of weeks it took for each rate hike to be passed onto the products we offer on our platform.
A breakdown of the deltas between the base rate and the average of the rates of various products justifies the recent scrutiny of the banks, especially regarding the easy access products, and our retail easy access delta showed the widening difference.
But this graph also highlights the speed at which the Bank of England has been hiking its base rate – last week was the 13th consecutive rise – with banks also struggling to keep up with the Monetary Policy Committee’s hawkish rate policy to bring inflation down to acceptable levels.
Last Thursday’s hefty hike was unexpected – most forecasters said they only anticipated a 0.25bps rise to 4.75%– and many banks were taken by surprise by the central bank’s decision. It now stands at the highest level it has been in 15 years.
One explanation for why banks may take longer to bring their deposit rates in line with the Bank of England’s rapidly rising rate is because one of the key drivers for banks for revenue is the Net Interest Margin – also known as NIM.
The NIM is the difference between banks’ money borrowing and banks’ money lending. For instance, an individual saver deposits money into a UK bank account with a 1.5% interest rate but another person takes out a loan at 5% – the bank would hypothetically take a 3.5% margin.
When the Bank of England puts up its base rate, banks and other lenders raise their mortgage rates as the cost of borrowing increases before bringing their deposit rates in line with the hike to maintain a strong balance sheet. In a nutshell, banks are trying to balance lending and funding.
UK Finance, the trade body for the banking sector, meanwhile, has said that saving and mortgage rates were not ” directly linked and therefore move at different times and by different amounts”.
Quicker rate adjustments
In this context, we also looked at whether banks have been more reactive in passing base rates to customers – especially on our platform, where we offer high-rate savings options.
This yielded an interesting discovery.
Across the spectrum of our products, the majority took a shorter period to absorb the rate hike recently as opposed to at the beginning of the rate hiking cycle, when the first Bank Rate increased to 0.5% in February 2022 up from 0.25%.
Comparing the adjustments between the first 25 basis point increase and the most recent 25 basis point increase in May across some key products showed that the time range was at least halved, for both Retail and Business products.
Room for growth
While the Treasury’s argument that banks’ passing on of interest rate hikes to cash savers has been “unusually weak”, we also found that through exclusive rates provided by both larger banks and smaller challenger banks to Insignis Cash clients and partners, we have been able to track the rates, with more options in excess of 4.07% AER on easy access accounts, and up to 6.10% AER for a fixed three-year account.
Banks have been catching up with the base rate and are already paying higher returns on longer-term savings products.
Paul Richards, Insignis Cash Chairman, said: “While banks still have room to further increase the rate of Easy Access products, they seem to have turned a corner and are increasingly offering competitive saving rates in line with the base rate.
“We are seeing 6.1% fixed rate three-years products. With data suggesting banks are now passing on the interest rate rises faster; it shouldn’t be long until we see shorter term saving products at 6%.”
As the UK prepares for a new round of hikes expected to reach up to 6% before the end of the year, now is a better time than ever to be shopping around for rates to capitalise on the increased responsiveness of products, including with less well-known brands that have the same deposit protection as the larger banks.