The Bank of England raised its main interest rate by 0.25 percentage points today, bringing it to 4.5 per cent, the highest level since 2008. This is bad news for those buying a house, a car, or anything else that’s paid for with debt. Conversely it should be good news for savers, because as a saver you’re lending money to the bank.
But no: it’s good news for banks, who will update their mortgage rates today, and their savings rates when they’ve given it a bit more thought, or never.
This is the conclusion of the Treasury Select Committee, whose MPs wrote again to banks yesterday asking them to justify charging ever higher interest to borrowers while savings accounts, especially the standard “instant access” ones, pay rates that Harriett Baldwin, the chairwoman of the committee, described as “measly”. “They adjust mortgage rates, literally, the day the Bank of England raises rates – but savings rates have been incredibly sticky,” said Baldwin.
Baldwin has written to all the big banks asking how much they’re making from savers, and has in every case been told this is too “commercially sensitive” to share, but we can get a good idea of how it’s going from their first-quarter earnings reports, which list their “net interest income”. This is the amount they make from the interest they charge borrowers, minus the interest they pay depositors.
HSBC’s pre-tax profits for the first three months of 2023 were triple the previous year, and the most significant factor in HSBC’s climbing profits was a 38 per cent increase in net interest income against the same period last year, representing $2.48bn in extra profit. Barclays’ net interest income was up 21 per cent year-on-year in the first quarter of the year, while Natwest’s was up 43 per cent.
Net interest income is, “for a typical bank, the largest and most important part of their profits”, explains the economist and banking expert Frances Coppola. It’s also the part that has been squeezed, since the financial crisis – interest rates have been close to zero, and because banks were never going to be allowed to pay savers less than zero interest, that didn’t leave much room for margin. After this 15-year damper, Coppola says, there is a sense among banks that interest margins – and therefore profits – can get “back to normal”.
In their replies to Baldwin, banks have been quick to point out that they are offering accounts with what look like very attractive interest rates. First Direct (which is owned by HSBC) offers a savings account with a 7 per cent headline rate. But (as is the case with most of this type of account) you can only pay in £300 a month, and you need to switch to First Direct’s current account and make a regular deposit, so basically you’ll use it as your main account. Which is fine (First Direct scores very highly for customer service) but it means that 7 per cent rate is effectively a bribe for switching bank, and not a huge one, because it’s interest paid on £300 a month for one year – a grand total of £136.50. If you plan to save £3,600 in a year, this is great, but if you’re an older person with a career’s worth of savings being rapidly eroded by inflation, it won’t help.
It’s these people Baldwin is most concerned about – millions of “older, loyal customers who don’t feel comfortable shopping around” online, who previously relied on a bank branch that isn’t there any more, and who are being “exploited” as a result.
But it’s also unfair to everyone else. Let’s return to what the Bank of England is doing today: raising rates. There are two ways this helps to lower inflation: it makes debt more expensive, so that people buy less with debt, demand falls and prices rise more slowly; but it’s also supposed to make saving more attractive, so that people with money put it in the bank rather than spending it (which again lowers demand and subdues prices). If you have an HSBC Flexible Saver or a Lloyds Easy Saver, you’ll earn less than 1.5 per cent interest at a time when inflation (CPI) is 10.1 per cent. “The incentive is to spend the money, not save it,” says Coppola. “So it’s actually leaning against what the Bank of England is trying to achieve.”
A bank might read that and think (not out loud, of course) that if inflation trebles one’s profits, a little inflationary price-gouging is good for business. The fun might not last, though: in the US disgruntled consumers have been moving their deposits from savings accounts to higher-paying options such as money market funds for several months, with serious consequences for some mid-sized banks. In the UK and Europe consumers are still incentivised to seek returns from risky investments or scams such as cryptocurrencies. “There is an argument,” says Coppola, “that the refusal of banks to pass on interest rate rises to depositors actually increases financial stability risk.”
Things may change in July, when the Financial Conduct Authority’s new “consumer duty” comes into effect and makes offering “fair value” a requirement for any institution offering savings accounts. If inflation (and the rates that fight it) remains stubbornly high, however, the gulf between borrowing and saving will become more evident and the calls for stronger measures, such as windfall taxes, will get louder.