AJ Bell : Bank bosses face Treasury grilling over interest rates on cash and mortgages

Bank bosses face Treasury grilling over interest rates on cash and mortgages

Laura Suter

7 February 2023

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• Bosses from Barclays, Lloyds, NatWest and HSBC questioned by Treasury Committee
• Committee says customers are earning between 0.5% and 0.65% on basic savings accounts, well below inflation the Bank of England base rate
• Variable rate mortgages increased 2% last year, but fixed-rate ISAs rose by just 0.5% over the same period

Laura Suter, AJ Bell head of personal finance:

"Banks respond to two forces: the Base Rate and competitors. They will use Base Rate as a gauge of whether to raise their savings rates, but of much more importance is what their competitors are doing. No bank is going to hike rates dramatically above the highest rival, as they only need to nudge it slightly over their competitor's offering to win business.

"On top of this, banks are very keen to protect their profits, which comes at a cost to UK households. While mortgage rates have shot up, savings rates haven't risen by nearly as much and some banks are worse than others for pocketing the difference rather than boosting savings rates. Banks make money on the difference between what they charge those borrowing money and what they hand over to savers - the bigger the difference, the bigger the profits.

"Understandably, banks are also concerned about what's coming in the rest of the year. A recession means people losing their jobs, which in turn means more people defaulting on their mortgage or other debt, which is a cost for banks. On top of that, a similar trend will be seen in the commercial market, with businesses defaulting on loans. Many banks are preparing for a wave of defaults and trying to shore up their balance sheets in anticipation.

Shop around to get the best rates

"Brits are sometimes lazy when it comes to moving their savings to get a better rate. Lots of people stashed away cash during the pandemic and many are still sitting on these cash pots, often in their current account or in old savings accounts paying very little interest.

"It means a lot of high-street banks don't need to raise their savings rates to attract more business, as they have enough of the nation's savings anyway.

"Until savers vote with their feet and move their money to accounts with better rates, these big brand names don't need to offer more attractive deals.

"We've seen a savings war in the past year and there are now great deals out there for people who want to get a decent return on their cash. If you hunt around for a better deal you can get more than 3% for easy-access, up to 7% for regular savings and more than 4% for a one-year fixed rate account.

"All of this is a far cry from a year ago, and it means savers are starting to shift their money from zero interest accounts. The latest Bank of England figures show that in the final two months of 2022 savers took £7.7bn out of easy-access accounts paying little or no interest and at the same time funnelled £17.3bn into fixed rate accounts, where rates have shot up."

Laura Suter Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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