Banks taking too long to pass on savings rates

According to Chancellor Jeremy Hunt, banks are taking too long to pass on increases in interest rates to savers, particularly those with instant access accounts. While banks have swiftly raised interest rates for mortgage customers, they appear to be slower in increasing returns for savers. The trade body for the banking sector argues that saving and mortgage rates are not directly linked, but Hunt raised the issue with banks last week, emphasising the need for a resolution. He stated that the rates are being more frequently passed on to those with fixed-term or fixed-notice accounts.

Recent data shows that the gap between average mortgage and savings rates has widened since December 2021 when the Bank of England started raising interest rates to combat rising consumer prices. In December 2021, the gap was 2.19%, with the average two-year fixed mortgage rate at 2.38% and the average easy access savings rate at 0.19%. As of Monday, the average two-year mortgage rate reached 6.23%, while the savings rate was 2.36%, resulting in a gap of 3.87%. Although the gap has expanded since the interest rate hikes began, it is smaller than the 4.24% gap observed in December 2022.

The profitability of banks generally increases with interest rate rises, as it boosts net interest income. However, UK Finance, the trade body for the banking sector, argues that savings and mortgage rates are not directly linked and can move at different times and by different amounts. Various factors, including the desire for instant access or longer-term deposits, influence savings rates. MPs on the Treasury Committee have frequently raised concerns about savings rates not being aligned with mortgage costs.

The Chancellor is scheduled to meet with regulators to discuss inflation and how interest rate changes are transmitted to consumers. While the Treasury stated that Hunt maintains regular contact with banks, the issue of savings returns has now been publicly highlighted. The banks have previously defended their savings rates, claiming that savers have access to competitive deals. However, Lloyds Bank recently faced criticism for offering “measly” interest rates on savings. The Chancellor’s focus on the issue reflects the need to ensure that savers benefit from interest rate increases in a timely manner.