Savers not seeing all of Bank of England’s interest rate hikes, Bailey suggests

Andrew Bailey, governor of the Bank of England, suggested that banks had not passed on the full benefit of the central bank’s interest rate hikes onto consumers.

In a speech given on Monday evening at Loughborough University, Bailey noted that before the financial crisis it was typical for deposit rates paid to savers to be a bit below the Bank Rate.

When interest rates fell to near zero, however, deposit rates were moved above the Bank Rate which hit banks’ net interest margin (NIM), a key measure of profitability.

Following the Bank of England’s aggressive bout of monetary tightening over the past two years, the Bank Rate has climbed back above average deposit rates. “This reversion to past patterns does imply that overall deposit rates have risen by somewhat less than Bank Rate,” Bailey said.

“The old relationship whereby deposit rates averaged below rather than above Bank Rate has been re-established,” he continued.

Looking across all interest-bearing deposits, interest rates have increased by 2.5 percentage points while the Bank Rate has climbed by 5.15 per cent.

However, Bailey pointed out that rates on offer in fixed-term accounts had climbed by 3.7 percentage points since December 2021 compared to 2.1 percentage points for sight accounts.

This largely reflects changes to bank regulation, he said, which have incentivised banks to hold more term deposits which cannot run as quickly.

“This was a deliberate choice to increase stability,” Bailey said. “The incentive to take more stable deposits has been carried through into pricing”.

The pricing difference has also then incentivised consumers to move more funds into time accounts. Deposits held in time accounts have increased by eight percentage points since the end of 2021.

The UK’s largest banks have been scrutinised by MPs and watchdogs for not passing on interest rate hikes to savers while they reap the benefits of wide net interest margins.

Speaking to City A.M., Harriett Baldwin, chair of the influential group of MPs, said “we will be going through the results with a fine tooth comb to see how much of that net interest margin they’re passing on to our constituents”.