MPs, campaigners and activists are increasingly concerned that savings rates are failing to keep pace with the rapid rise in borrowing costs, putting the behavior of the UK’s biggest banks in the spotlight.
There are a few reasons why UK banks are taking so long to pass higher interest rates on to savers:
- Competition: Banks compete with each other for customers and only want to offer higher interest rates if their competitors do. This is because they would lose customers to the banks that offer higher rates.
- Costs: Banks have also faced rising costs, such as funding their loans. This means they have less money to pass on to savers in the form of higher interest rates.
- Regulation: Banks are also regulated by the Financial Conduct Authority (FCA), which sets rules on how much interest they can pay on savings accounts. This means that banks can’t just raise interest rates whenever they want.
However, there are some signs that banks are starting to pass on higher interest rates to savers. For example, the average interest rate on easy-access savings accounts hit 2.27% in June 2023, up from 0.85% in September 2022. This is still far from the 5% base rate, but it’s a start.
Banks will likely continue to pass on higher interest rates to savers in the coming months. However, it’s also likely that the pace of increases will be slow as banks weigh the competing pressures of competition, costs, and regulation.
Here are some tips for savers who want to get the best interest rates:
- Shop around: Compare savings accounts to find the one with the highest interest rate.
- Consider fixed-rate accounts: Fixed-rate accounts offer a guaranteed interest rate for a set period, which can be a good option if you’re worried about interest rates falling.
- Consider online banks: Online banks often offer higher interest rates than traditional banks.
- Feel free to switch accounts: If you’re not happy with the interest rate on your current savings account, you can switch to a different version with a higher rate.
A clear picture of how big the profit haul from higher rates may have yet to emerge, given how rapidly rates have risen this year versus last.
In addition to these reasons, a few other factors may be contributing to the delay in passing on higher interest rates to savers. These include:
- The uncertainty of the economic outlook: The Bank of England has warned that the UK economy is facing several headwinds, including rising inflation and slower growth. This uncertainty may make banks hesitant to raise interest rates too quickly, as they want to avoid further squeezing the economy.
- The low level of competition in the savings market: The savings market is relatively concentrated, with a small number of banks dominating the market. This lack of competition may give banks less incentive to raise interest rates, as they know that savers only have a few other options.
Several factors contribute to the delay in passing on higher interest rates to savers. Banks are expected to increase their interest rates in the upcoming months as the base rate also increases.
Here are some tips for savers who want to get the best interest rates:
- Shop around: Compare savings accounts to find the one with the highest interest rate.
- Consider fixed-rate accounts: Fixed-rate accounts offer a guaranteed interest rate for a set period, which can be a good option if you’re worried about interest rates falling.
- Consider online banks: Online banks often offer higher interest rates than traditional banks.
- Feel free to switch accounts: If you’re not happy with the interest rate on your current savings account, you can switch to a different version with a higher rate.
According to Moneyfacts data, some smaller competitors, such as GB Bank, Oxbury Bank, and the building societies Principality and Coventry, offer accessible access accounts with more than 4% interest.
This discrepancy is under intense scrutiny from the City watchdog. The Financial Conduct Authority has warned banks it may introduce a minimum rate for such products if consumers continue to face “loyalty penalties” by looking to their current account provider, often a high street bank, to save products.
Lewis and charities are watching and waiting to see whether consumer duty has a real impact. Citizens Advice said the task needed “to be underpinned by clear, unambiguous rules, effective monitoring and proactive enforcement”.
Still, even a well-enforced duty would face limits on how it can influence savings rates.
Some banks sustained profits throughout a decade of low-interest rates, but investors believe this was because they generally track economic growth. The near-term forecast for UK gross domestic product is meagre at best.
A spokesperson for HSBC UK said the bank provided a broad range of savings products to consumers, adding: “We have increased interest rates on savings accounts a dozen times in just over a year, and every savings product has seen its interest rate increase on multiple occasions during that time, supporting customers to start a positive savings habit and save towards longer-term goals. We will continue to keep rates under review.”
