What you need to know about interest rates and why banks are hesitating to pass down the savings

The Bank of England’s (BOEs) decision to maintain the base interest rate at 5.25 per cent for the third consecutive time in December, following a series of fourteen increases in less than two years, has significant implications for savers.

Since December 2021, interest rates went from a historic low of 0.1 per cent to the highest level since the 2008 financial crisis.

This move aims to curb soaring inflation, which, despite a recent decline, remains above the Government’s two per cent target at 4.6 per cent.

The impact on savers

In theory, higher interest rates should translate to increased savings rates. However, many banks have been slow to pass these benefits to savers.

While savings rates have improved since December 2021, they often lag behind the base rate increases.

This reluctance can be attributed to several factors, including:

  • Operational costs – Banks face various operational and administrative costs, which can delay the transmission of higher interest rates to savers.
  • Profit margins – Banks may choose to widen their profit margins by not passing the full extent of the rate increase to savers.
  • Economic uncertainty – With ongoing economic fluctuations, banks might be cautious in their approach, waiting to see if the rate stabilisation is a long-term trend.

What savers can do

A recent survey from the Building Societies Association found that nearly a quarter of people don’t check the interest rate before opening a savings account, and a third fail to compare interest rates between other accounts.

It is these relatively high numbers that also give the banks the confidence to not pass down the savings, as the stats show that they are unlikely to lose their customer base.

Given this scenario, savers need to be proactive in managing their finances:

  • Shop around – Look for banks or financial institutions offering higher interest rates on savings accounts. Do not hesitate to switch if you find a better rate.
  • Consider fixed-term bonds – Fixed-term bonds might offer higher interest rates compared to regular savings accounts. However, this means locking in your money for a set period.
  • Explore ISAs – Cash ISAs can be a tax-efficient way to save, especially if you’re nearing your personal savings allowance limit.
  • Pay off debts – If you have debts, especially those with high interest rates, consider using your savings to pay these off. The interest saved on debts can often outweigh the benefits from savings accounts.
  • Think long-term – For those with a longer investment horizon, considering options like stocks and shares ISAs might offer better returns, albeit with higher risk.

The broader picture

The Bank of England’s interest rate decisions are influenced by various factors, including inflation, economic growth, and global financial trends.

While higher rates aim to control inflation, they also impact borrowing costs, business growth, and consumer spending.

Looking ahead

The next interest rate decision is scheduled for 1 February 2024. Savers should stay informed about these developments, as they can significantly impact savings strategies and financial planning.

If you would like more advice and guidance on savings, please reach out to our expert team today

Posted in Blog, Wealth Management News.