UK Savings Market Recovery Weakened by Bank of England Lending Schemes

By: MoneyFacts

The latest data from moneyfacts.co.uk reveals that the savings market has now had seven consecutive months wherein rate rises have outweighed cuts, with July seeing 151 rises versus 45 cuts.

Fixed rate bonds are continuing to play a huge part in the recovery of the market, with 60% of the recorded rate rises last month being for fixed rate bonds. In fact, the average two-year fixed bond has grown from 1.04% to 1.32% since the start of the year, and a similar picture can be seen for longer-term bonds. The average three-year fixed bond has grown from 1.21% to 1.56%, while the average five-year fixed bond is up to 1.92% from 1.67% in January 2017.

Despite this, savings rates overall still have a long path to recovery ahead of them, especially as improvement is currently being dampened by Government lending initiatives, with one such prominent scheme having just received a fresh money injection.

In addition, the true return on cash savings remains poor, as statistics released today show that the Consumer Prices Index (CPI) remained at 2.6% during July, so as it stands, there is still not one standard savings account on the market* that can beat inflation. Only one account (a seven-year bond) can match its rate.

Rachel Springall, Finance Expert at moneyfacts.co.uk, said:

“The decision to pump more money into the Term Funding Scheme (TFS) is disastrous news for savers, as its continuation will allow banks and building societies to draw cheap money to fund their lending, which means they still won’t need to rely on savers’ deposits.

“Five years ago, the predecessor of the TFS, called the Funding for Lending Scheme (FLS), aided borrowers, but like a double-edged sword, it created havoc in the savings market. In July 2012, the average two-year fixed bond fell from 3.34% to 1.84% in just 12 months. Today, it stands at 1.32%, which marks a loss of £202 in interest on a pot of £10,000 over the last year.

“Not only this, but there have been other Government initiatives which have damaged the return on savings interest for ISAs, such as the Personal Savings Allowance which has shocked the ISA market since its introduction last April. The average easy access ISA paid 1.05% at that point, but today it stands at 0.62%.

“Savers are likely to have a few more years of low interest rates ahead of them. Combined with inflation eroding their hard-earned cash, it wouldn’t be too surprising to find this is deterring people from putting money aside.”

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