Over the last week, the bosses of the large UK banks were questioned by the FCA as to why interest rates on cash savings were not rising in-line with the Bank of England Bank Rate, whilst mortgage rates have been.  Do you trust banks to do the right thing and raise interest rates on savings, even when legally they are well in their rights to keep deposit rates at low levels?  Banks are generally not trusted or liked by the British public.  The British phrase of ‘it’s just not cricket’ relates to not being fair, honest, moral and having integrity (suggesting cricket upholds those traits) and you can relate it to the banks in not increasing savings rates.  That was until Jonny Bairstow’s dismissal by Australia in the Lord’s cricket test.  It was legal, however it wasn’t in the spirit of the game and showed that even areas that are usually seen as being fair, moral and having integrity can sometimes turn a blind eye.

Why are banks not raising interest rates for savers as quick as they are for borrowers?

I would argue that whilst banks aren’t always fair, honest, moral and have integrity, on this occasion there is a reason why banks are not raising interest rates for savers as quick as they are for borrowers.  Banks do a job that no-one else wants to do.  They borrow from savers, usually offering instant access to those savings.  They then lend to borrowers, often for 20 years or more.  In other words, their liabilities can be called upon straight away and they can’t sell or call in some of their assets for 20 years.  Banks earn a margin for doing this job, basically the difference between the interest rate they pay on deposits compared to the interest rate they earn on mortgages and loans.  For the last decade, interest rates on mortgages and loans have been very low and as these are often fixed interest rates for a period of time (often 2,3,5 year fixed mortgages), it will take a while for the banks to earn more interest from these assets.  It will therefore take a while before the interest rate they offer on savings will increase.

I can see banks keeping interest rates on savings as low as possible for as long as possible as banks will want to maximise their profit margin, which they haven’t been able to do for over a decade.  However, there will be competition for savings at higher rates over the next year or so, which will offer savers more options.

Another issue we have seen recently is that numerous institutions have started to cap or limit the interest that they pass onto savers to increase their own margins.  This is pure profiteering as usually the institutional doesn’t offer the banking service themselves.

How have we altered our portfolios?

We have started to use money-market funds more in portfolios, as they do benefit from receiving interest rates similar to the Bank of England Bank Rate.

Adrian Mee and myself are hosting a webinar on Wednesday 2nd August, where we will discuss interest rates on savings and low-risk products, so please join us if you are interested in our views.

Click the link below to REGISTER!

https://us02web.zoom.us/webinar/register/2016250632803/WN_7YQPpnSbRXavJUEbsnHr5w

Thanks for reading and enjoy the journey!