Why cash-rich UK banks won’t pass on rate rises to savers

Analysts say banks with ample liquidity will not offer higher interest rates to savers.

New analysis shows that Savers will face years of stagnant returns due to the inability of cash-rich banks to pass on Bank of England rate increases.

Deutsche Bank says that banks on the high streets have no need to compete with savers because of the substantial increase in bank deposits seen during the pandemic.

Since 2019, deposits have increased by 25%, far exceeding loan growth of 7pc.

According to Bank of England data, household deposits are currently at £1.8 trillion. This is almost equal to the outstanding loans in the economy, for the first time since 1997.

During the pandemic, corporate savings also rose sharply.

Robert Noble, an analyst with Deutsche Bank, stated that there are many deposits right now and that everyone has enough liquidity to pass on savings rates.

He said that the trend would likely continue for “a few years”.

Deutsche Bank’s analysis has shown that high-street banks can afford to lose 14% of their deposits, or tens to billions of dollars, to other providers before they need to find funding. Noble stated that they could lose substantial amounts of deposits, but it wouldn’t matter.

The Bank of England raised interest rates by 0.1pc to 1.75pc at the end of 2021, a record low. However, Mr Noble stated that many banks on the high street have no incentive to raise rates to secure funding.

He expects banks will pass on rate increases as they climb higher but a “massive increase in liquidity” via quantitative easing and higher government spending suggests that the pass-through would be lower than before the financial crisis.

Banks were less likely to compete for cash because of customer indifference to better returns.

Mr Noble stated that Prime Minister Liz Truss’s tax cuts and support for the energy bill will lower banks’ incentives to pass rate increases on. However, it will push up returns for savers as well as costs for borrowers. As interest rates rise towards 4pc to maintain a lid on inflation, it will increase costs for borrowers and push up returns for those who have saved.

“Liz Truss’s £200bn in fiscal expenditure has ensured that money remains in our system,” he said. He said that he doesn’t expect a significant decrease in savings [liabilities] nor a large increase in loans [assets].” It will remain this way for the next couple of years. This is something I would not have said before the election for the presidency. We believed that less fiscal response, greater fiscal consolidation, and the central bank shrinking their balance sheets were better options.

Deutsche Bank stated that mortgages have been the largest money-maker for high-street banks since the financial crisis. However, rising interest rates will likely increase bank returns on deposits.

The report also stated that current account balances have risen by 40pc between 2019-2021. Many high-street banks pay no interest on these accounts, which helps to boost profits, as rates rise.

Moneyfacts currently show that the average interest rate for an easy access rate is 0.84pc. Savings can be tied up for one year to earn more than 2pc annually if they are willing.

As liquidity has increased, lagging returns for savers are becoming more common around the world. Mark Cabana and Katie Craig, Bank of America analysts, highlighted the fact that money market funds have held upwards of $2 trillion (£1.75 Trillion) in excess funds at the Federal Reserve overnight since the beginning of the summer, amid uncertainty about interest rates.

They stated that the deposit lag “is likely to continue until banks realize they are becoming too tight with funds.” Banks will eventually run out of deposits they don’t want and lose valuable depositors. This will lead to higher interest rates for funds. Banks will be competitive.”

At its Thursday meeting, the Bank of England will likely raise interest rates by more than 2pc. This would be the highest rate for a year since 2008.

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