Both the UK and US central banks have made significant announcements over the last six months. The Bank of England has increased its base rate from 0.1% to 1.25% between November 2021 and June 2022. The US Federal Reserve has also increased its rate from 0.25% to 1.75% over the same period. These are now at their highest level in 13 years.
In addition to raising rates, in June 2022 the Federal Reserve began to shrink its balance sheet, commonly called Quantitative Tightening. In the UK, this process started in March 2022 and by current projections, the Bank of England bond portfolio will shrink by more than £200 billion by the end of 2025. It is the changes in base rates that will make the headlines, but Quantitative Tightening will have a far larger and longer-term effect on the UK savings market.
What is the impact on the UK savings market?
There is often a lag between a change in the base rate and a rate increase from banks and building societies. This lag was material after the first base rate rise in December last year (although year-end timing will have played a part in that delay). However, banks and building societies are moving more quickly following more recent rate increases.
Inertia – the banks are betting on it
With rates improving, banks and building societies profit as a result of savers' inertia to change accounts or transfer deposits. This is because our irrational brain interprets changing banks or accounts as a risky endeavour, regardless of it making economic sense.
It is estimated that there are more than £1.6 trillion in UK cash deposits that could be working harder.
Review rates
With inflation ripping through the UK economy at circa 9%, whilst the differential between available savings rates and current inflation is still negative, ensuring you are commanding as much interest as possible will go a long way to helping during these difficult times.
Whether it is reviewing interest rates available with your existing bank or building society, or reviewing accounts available in the wider market, cash savings can and should be working harder. With rates improving quickly, now is the time to review.
Cash management platforms
Cash management platforms have now established themselves on the market. These platforms are like “savings supermarkets”, where savers can transfer their savings between banks and building societies at the click of a button. These platforms take away the laborious process of completing multiple application forms and enable savers to take advantage, quickly, of increasing interest rates.
Investments in cash deposits, whilst seen as secure in relation to other assets, are subject to inflation risk.
This article should not be construed as a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances. No action should be taken without seeking further formal advice.
MHA Moore and Smalley is the trading name of Moore and Smalley LLP. Moore and Smalley LLP is regulated by the Financial Conduct Authority, FCA registration number 448716.
