Bank of England Base Rate

RG2015

The Bank of England base rate has recently increased by a significant amount and this is expected to continue for the remainder of this year.

There have been numerous posts criticising banks for not matching these increases in their savings accounts.

Savings rates have never been linked to the base rate (unless specifically stated in their Ts & Cs).

My question is why do so many people think the banks should automatically raise their rates in line with the BoE base rate?

eskbanker

Because there seems to be a widespread perception that institutions cut savings rates when the base rate drops?

dale_cotterill

Bank of England pays base rate on deposits held with the BoE. So this directly factors into the profit/cost of savings rates. So base rate and savings rates are intrinsically linked. As you point out though, not contractually.

The point of banks offering savings rates are to fund lending, so this ultimately funds that. If the largest banks can get away with not increasing savings rates when the base rate increases it means they can invest it in keeping lending rates lower.

If you are a building society like Skipton etc, you still have to compete with lending rates from the big banks, which you can't do if you increase savings rates by the same as base rate each time.

HappyHarry

Traditionally, banks pay interest to depositors at a little below BOE rates, and charge debtors (loans / mortgages) a little above BOE rates. The bank makes the profit in the difference between their lending and borrowing rates.

In recent years, the BOE rate has been so low that both the lending and borrowing rates have been above BOE rates. This was never sustainable, and as BOE rates move up, we will see borrowing and lending rates moving back towards their traditional positions.

This will of course, be criticised by savers and the Daily Mail, and ignored by borrowers.

Mr_K

Opening a Skipton base rate tracker cash ISA at the beginning of the year was one of my better moves. Automatically passes on base rate rises in full.  Now paying 2.1% instant access. 

GSP

What is the base rate now, something like 1.75%. Hardly significant when 5% was the norm. I can imagine margins are still squeezed, so until the base rate does rise to something notable i.e. above 5% you won’t see much pick up in rates.

Rates are still so low historically, not good for savers but because house prices have soared in their own bubble, not good for those with mortgages either where a small increase in percent can have a devastating effect on the stupid amount paid for a house now.

Cus

The intermarket rates will reflect the real world cost of lending and borrowing. It has disconnected from the boe rate somewhat for a number of years.  Perhaps it will stay disconnected but on the other side of the curve in the near future.

MiserlyMartin

eskbanker said:

Because there seems to be a widespread perception that institutions cut savings rates when the base rate drops?

Its a correct perception because they do. Regarding mortgage payers, well nobody forced people to take on mortgages that they couldn't afford in the likely case that rates will return to normal.

Albermarle

HappyHarry said:

Traditionally, banks pay interest to depositors at a little below BOE rates, and charge debtors (loans / mortgages) a little above BOE rates. The bank makes the profit in the difference between their lending and borrowing rates.

In recent years, the BOE rate has been so low that both the lending and borrowing rates have been above BOE rates. This was never sustainable, and as BOE rates move up, we will see borrowing and lending rates moving back towards their traditional positions.

This will of course, be criticised by savers and the Daily Mail, and ignored by borrowers.

Although the smaller banks, like Aldermore, Shawbrook etc can offer better rates. Maybe their lending rates are a bit higher as they tend to lend to SME's, car finance etc 

dale_cotterill

Albermarle said:

HappyHarry said:

Traditionally, banks pay interest to depositors at a little below BOE rates, and charge debtors (loans / mortgages) a little above BOE rates. The bank makes the profit in the difference between their lending and borrowing rates.

In recent years, the BOE rate has been so low that both the lending and borrowing rates have been above BOE rates. This was never sustainable, and as BOE rates move up, we will see borrowing and lending rates moving back towards their traditional positions.

This will of course, be criticised by savers and the Daily Mail, and ignored by borrowers.

Although the smaller banks, like Aldermore, Shawbrook etc can offer better rates. Maybe their lending rates are a bit higher as they tend to lend to SME's, car finance etc 

Almost none of them have gone through a full economic cycle though. and their lending would suggest they'd be at the front of the queue when it comes to probability of default. This will be the test over the next couple of years to see if their business model actually works.

MDMD

Mr_K said:

Opening a Skipton base rate tracker cash ISA at the beginning of the year was one of my better moves. Automatically passes on base rate rises in full.  Now paying 2.1% instant access. 

I did the same. It’s making up for my error in 2008 when I moved from an instant access but fixed rate ISA with First Direct to a variable rate one paying slightly more only to see rates plunge a month later.