The past, present, and future of UK savings rates

by Insignis in Industry Perspective

The past, present, and future of UK savings rates 

The coronavirus pandemic affected the UK economy in unprecedented ways. In response to the crisis, the government introduced several monetary policies and banking supervision measures to mitigate economic impact.

In this months ‘Insight’, we look back at how the Government’s response to COVID-19 impacted interest rates, where we are now and what the future of interest rates might be as the economy begins to recover.    

Summary:

  • The Bank of England introduced 4 key pillars in response to the COVID-19 pandemic.
  • The economy has started recovering and average rates across many savings accounts have continued to rise month-on-month.
  • Savers should be proactive and actively search for the best accounts for their cash savings.

The past: the Bank of England’s response to COVID-19 

There were 4 key pillars:

1. Introduction to government lending schemes
In early 2020, the Government established 3 business loans schemes in response to the pandemic:

  • the Coronavirus Business Interruption Loans Scheme (CBILS)
  • the Coronavirus Larger Business Interruption Loans Scheme (CLBILS)
  • the Bounce Back Loans Scheme (BBLS).

2. Interest rates were cut 
On 19 March 2020, the Bank of England cut their official interest rate (bank rate) to just 0.10%. The bank rate is the single most important interest rate in the UK, as it acts as a reference for a range of other financial products.

The lower interest rate was introduced to eventually feed through to lower borrowing costs for businesses and households, helping the economy stay afloat.

3. The Term Funding Scheme was introduced 
Banks and building societies were offered long-term funding at interest rates at, or close to, 0.10%. This enabled them to reduce the interest rates that they charged their customers.

4. Banks were assisted with lending 
The number of financial resources that banks and building societies needed to set against their lending to UK businesses and households was reduced.

UK banks also agreed not to pay any dividends to their shareholders in 2020. The Bank of England published guidance for banks on dividends relating to their full-year 2020 results.

For dividends relating to 2021 results, prudent dividends were accrued but not paid out.

What did this mean for UK savers? 

As a result of the government-backed loan schemes, banks lent significantly more than they normally would. In a lot of cases, businesses were advised to draw down on these facilities ‘in case of need’. Funds were placed into Current and Savings accounts.

The additional credit balances held by customers created an excess liquidity position for Banks.

Excess liquidity occurs when the banking system has more money in circulation than the banks demand and this, therefore, generates an excess supply of money.

If there is an excess, the law of supply and demand concludes that the prices decrease. This is what we saw with interest rates, which of course was bad news for savers.

The present: economic recovery

At the last monetary policy meeting in November, the MPC voted by a majority of 7-2 to keep the base rate unchanged at its historic low of 0.10%. Our view at the time was that it was an appropriate response, as there were many risks to consider around economic growth and the labour market.

As we’ve begun to return to work and more businesses are re-opening, the economy has been actively recovering from the COVID-19 crisis. As such, the funds lent under the government-backed loan schemes have also begun to be repaid or spent. This will once again reduce excess liquidity held with banks and as we have already seen, is resulting in interest rate increases for savers.

What does this mean for UK savers today?

The average rates on easy access savings accounts and fixed deposit accounts have continued to rise month-on-month recently. With average rates on instant access savings accounts rising from 0.17% in September to 0.67% in November.

Whilst many banks are still paying rates as low as 0.01%, we have continued to see our highest yields move significantly. For example, the average rate on a one-year fixed deposit account is currently at 0.76%, but clients on the Insignis platform can access rates as high as 1.35% on that product.*

The table below shows how our rates compare to major high street banks in 2020 vs 2021:

The future: expectations for future savings rates

CPI inflation is now expected to peak at around 5% in April 2022.  Inflation will then reduce materially from the second half of next year as supply disruption eases, global demand rebalances, and energy prices stop rising.

At the same time, UK GDP is projected to get back to its pre-pandemic level in Q1 2022. In terms of base rates, we continue to anticipate a rise being on the near horizon as inflationary pressures remain strong and there are signs that cost pressures may prove more persistent.

More specifically, the debate now centres on a rate rise of 0.15% in either December 2021 or February 2022. Our position is the unknowns around the Omicron variant increase the likelihood of a further pause until February. It is also worth noting that the Bank has never raised rate in December since it gained its independence in 1997.

We expect further increases next year up to a pause for breath at 0.75% which is right back where we started ahead of COVID-19.

In terms of longer-term savings rates, we expect a combination of the end of the Quantitative Easing (QE) programme combined with increasing competition in the banking sector to continue to drive savings levels higher.  This will be a slow and steady increase rather than a spike but will take us back to the pre covid savings environment over the next 12 months.

How can Insignis help?

With interest rates expected to continue rising, savers should be proactive and actively search for the best accounts for their cash savings. We realise that this process can be time consuming and laborious. Our cash management service helps savers do this with ease.

With a single sign up, Insignis clients can access over 30 banks and building societies, offering exclusive, market-leading savings rates, helping your cash savings work harder. Our platform enables you to reduce risk, increase returns and save time.

Find out more

To find out how much interest your client could earn through the Insignis platform, get in touch with us at info@insigniscash.com.

You can also click here to join our mailing list and receive our thought pieces by email.

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