Rubbish savings rates

dale_cotterill

RG2015 said:

dale_cotterill said:

RG2015 said:

subjecttocontract said:

No..........

This was just one of many references online to this supposed link between the BoE rate and the rate that savers get.

Banks and building societies don't help by instantly raising loan and mortgage rates when the BoE rate rises. Strangely they very rarely (if ever) instantly raise savings rates at the same time.

They even put messages on their websites and emails that following the BoE rate changes they are reviewing all of their rates.

I take a more pragmatic view. Banks may raise savings rates following a BoE rate increase but it is more of a marketing strategy to gain an advantage over the competition. This creates an apparent link that in truth is rather tenuous but nevertheless is perpetuated by mainstream and social media.

Banks earn interest on deposits at the BoE at base rate, and also tie their fixed term assets and liabilities back to what is effectively base rate. A massive over-simplification, but base rate is central to savings rates, not tenuous.

Can you explain your metric that is effectively base rate please?

It is either base rate or not base rate.

Second, if base rate is central to savings rates, why are there currently no easy access accounts anywhere near 3% when a few months ago there were many way above base rate?

An interbank lending rate, that banks and other financial institutions borrow from each other at. It tracks so close to base rate, it may as well be.

https://www.santandercb.co.uk/sites/default/files/documents/what-is-sonia.pdf

Second. It's a choice between taking extra profit, and increasing the rates to customers. Big banks don't need to increase rates to keep their customers, so keep paying them pitiful rates and make more profit. The rest is supply and demand, smaller banks that need more money have to increase rates, but as there is less competition in the market so rates don't go up as fast as base rate.

Also, with a slowing economy and recession, banks will not need as much savings for lending out again.

eskbanker

dale_cotterill said:

Second. It's a choice between taking extra profit, and increasing the rates to customers. Big banks don't need to increase rates to keep their customers, so keep paying them pitiful rates and make more profit. The rest is supply and demand, smaller banks that need more money have to increase rates, but as there is less competition in the market so rates don't go up as fast as base rate.

Also, with a slowing economy and recession, banks will not need as much savings for lending out again.

So you're agreeing that there are a whole range of factors involved in setting savings interest rates, rather than them necessarily being closely aligned with base rate movements?

RG2015

dale_cotterill said:

RG2015 said:

dale_cotterill said:

RG2015 said:

subjecttocontract said:

No..........

This was just one of many references online to this supposed link between the BoE rate and the rate that savers get.

Banks and building societies don't help by instantly raising loan and mortgage rates when the BoE rate rises. Strangely they very rarely (if ever) instantly raise savings rates at the same time.

They even put messages on their websites and emails that following the BoE rate changes they are reviewing all of their rates.

I take a more pragmatic view. Banks may raise savings rates following a BoE rate increase but it is more of a marketing strategy to gain an advantage over the competition. This creates an apparent link that in truth is rather tenuous but nevertheless is perpetuated by mainstream and social media.

Banks earn interest on deposits at the BoE at base rate, and also tie their fixed term assets and liabilities back to what is effectively base rate. A massive over-simplification, but base rate is central to savings rates, not tenuous.

Can you explain your metric that is effectively base rate please?

It is either base rate or not base rate.

Second, if base rate is central to savings rates, why are there currently no easy access accounts anywhere near 3% when a few months ago there were many way above base rate?

An interbank lending rate, that banks and other financial institutions borrow from each other at. It tracks so close to base rate, it may as well be.

https://www.santandercb.co.uk/sites/default/files/documents/what-is-sonia.pdf

Second. It's a choice between taking extra profit, and increasing the rates to customers. Big banks don't need to increase rates to keep their customers, so keep paying them pitiful rates and make more profit. The rest is supply and demand, smaller banks that need more money have to increase rates, but as there is less competition in the market so rates don't go up as fast as base rate.

Also, with a slowing economy and recession, banks will not need as much savings for lending out again.

Many thanks for your reply.

I agree with your first post that your statement was a massive oversimplification.

I think the truth is somewhere between our positions. I said the link was tenuous which is suggesting limited.

You said the BoE rate was central which suggests a very close link.

Tenuous vs central leads to an association which can be skewed by market conditions and individual banks’ business plans and their balance sheets.

The OP asks why savings rates are rubbish and well below the BoE rate.

There are numerous and varied answers. I say they are what they are and will continue to be so as long as we remain a free and open economy.

dale_cotterill

eskbanker said:

dale_cotterill said:

Second. It's a choice between taking extra profit, and increasing the rates to customers. Big banks don't need to increase rates to keep their customers, so keep paying them pitiful rates and make more profit. The rest is supply and demand, smaller banks that need more money have to increase rates, but as there is less competition in the market so rates don't go up as fast as base rate.

Also, with a slowing economy and recession, banks will not need as much savings for lending out again.

So you're agreeing that there are a whole range of factors involved in setting savings interest rates, rather than them necessarily being closely aligned with base rate movements?

I was never making the case that the setting savings interest rates were aligned with base rate movements (as in by moving the same amount), I was referencing the point made as to why the supposed link between rates and base rate was genuine, as a change in base rate has an immediate direct impact on the profitability easy access savings & SVR mortgages.

Products available to open change all the time, and are impacted by a huge range of factors. However I'm not aware of any bank that has changed rates upwards on accounts that are no longer available to new customers in the past decade, except in direct response to the base rate being increased. Which is why 'reviewing rates' after a base rate movement is clearly more than just a marketing tool.

RG2015

dale_cotterill said:

eskbanker said:

dale_cotterill said:

Second. It's a choice between taking extra profit, and increasing the rates to customers. Big banks don't need to increase rates to keep their customers, so keep paying them pitiful rates and make more profit. The rest is supply and demand, smaller banks that need more money have to increase rates, but as there is less competition in the market so rates don't go up as fast as base rate.

Also, with a slowing economy and recession, banks will not need as much savings for lending out again.

So you're agreeing that there are a whole range of factors involved in setting savings interest rates, rather than them necessarily being closely aligned with base rate movements?

I was never making the case that the setting savings interest rates were aligned with base rate movements (as in by moving the same amount), I was referencing the point made as to why the supposed link between rates and base rate was genuine, as a change in base rate has an immediate direct impact on the profitability easy access savings & SVR mortgages.

Products available to open change all the time, and are impacted by a huge range of factors. However I'm not aware of any bank that has changed rates upwards on accounts that are no longer available to new customers in the past decade, except in direct response to the base rate being increased. Which is why 'reviewing rates' after a base rate movement is clearly more than just a marketing tool.

I am continually learning new things in this area. The arguments are very nuanced and context is key.

I am sure this topic will be raised again next week after the BoE base rate announcement.

Thank you for your valuable contribution to the thread.

Johnjdc

Possible good news for us on fixes, ignoring the barely relevant month on month Bank of England rate.

After the Truss budget the 2-year government borrowing rate rose to about 4.5% and that's when interest rates started to get tasty.

After that was all undone, it collapsed - too far, I think, given global rising interest rates regardless of the UK situation, to as low as about 2.9%.

It's now approaching 3.5% again. Bank rates are often up to 1% above this for the most competitive banks, so we might start to see 4.5% come back again. Though I'd still grab the 4.31% 1-year if I was looking right now (luckily I got 4.6% in October).