In the 12 months since the first UK lockdown was announced, savings rates have fallen to historic lows, with many high street banks offering savers rates of just 0.01% on easy access accounts. Although the days of average savings rates of 5% or more have not been seen for well over a decade, savers are facing an unprecedentedly challenging market and will be looking for any signs that rates will start to improve.
Right now the picture looks bleak, but what about towards the end of the year when it is hoped that the economy will start to recover from the pandemic? Although the future is impossible to predict, especially during this time of economic uncertainty, to get an idea of what may happen to the savings market, we’ve looked at what has happened during previous periods of economic uncertainty to see if there is the possibility of average rates rising in the next 12 months.
In October 2008, the average savings rate on a one year fixed rate bond stood at 6.13%, while the average five year fixed rate bond rate was 5.06% and savers looking for an easy access savings rate would find the average rate stood at 3.81%. This is the last time that average rates were this high, as during October 2008, the impact of the credit crunch on the UK economy resulted in the Bank of England reducing base rate from 5% to 4.5%. After that, base rate continued to be reduced each month, falling to 3% in November 2008, 2% in December 2008, 1.5% in January 2009, 1% in February 2009, and finally 0.5% in March 2009, where it remained until August 2016, when it was cut further to 0.25%.
During a period of less than six months between 2008 and 2009, base rate fell by a total of 4%. Needless to say, as the chart below shows, the base rate cuts had a significant impact on average savings rates over the 12-month period from October 2008 to October 2009. The biggest fall was within one year fixed rate bonds, which fell by a total of 3.04% during this period, from 6.13% to 3.09%. The average five year fixed bond rate was not affected as significantly, falling by 0.29%, from 5.06% to 4.77%. Meanwhile, the average easy access savings rate fell almost as much as the average one year fixed bond rate, falling by a total of 3.01% during the 12 month period, from 3.81% to just 0.80%.
|2008-09 average saving rates|
|1 Oct 2008||1 Dec 2008||1 Feb 2009||1 April 2009||1 June 2009||1 August 2009||1 Oct 2009|
|One year fixed bond||6.13%||4.43%||2.94%||2.76%||2.97%||3.07%||3.09%|
|Five year fixed bond||5.06%||3.48%||2.95%||3.08%||3.77%||4.38%||4.77%|
It is clear that the cut in base rate had a significant impact on average savings rates during the 2008/09 economic crisis and the economic crisis of the last 12 months has also seen base rate cuts impact average savings rates.
Last March, in response to the impact the pandemic was having on the UK economy, the Bank of England cut base rate from 0.75% to 0.25%, just eight days later, the interest rate was cut again to a historic low of 0.1%. Although the impact of these cuts was not as significant as the cuts in 2008/09, base rate and average savings rates started the crisis at a lower point than before. As the chart below shows, during the last 12 months, the average one year fixed bond rate has fallen by 0.72%, from 1.16% in March 2020 to 0.44% in March 2021, the average five year fixed bond rate has also fallen by 0.72%, from 1.56% to 0.84%, while the average easy access saving rate has fallen by 0.40%, from 0.57% to 0.17%.
|2020-21 average saving rates|
|1 March 2020||1 May 2020||1 July 2020||1 Sept 2020||1 Nov 2020||1 Jan 2021||1 March 2021|
|One year fixed bond||1.16%||1.01%||0.71%||0.66%||0.62%||0.50%||0.44%|
|Five year fixed bond||1.56%||1.39%||1.13%||1.05%||1.05%||0.89%||0.84%|
An interesting difference between the average rates during the 2008/09 economic crisis and the average rates over the last 12 months is that average rates in 2008/09 began to rise after April 2009, however average rates in the last 12 months have continued to fall.
This could be due to the nature of the economic crisis being hugely different, with the current economic crisis ongoing until the economy can fully reopen only when the pandemic is under control.
As well as this, funding for lending schemes may have also contributed to the impact on average savings rates.
Funding for Lending schemes were introduced after the 2008/09 credit crunch as a way to encourage banks and building societies to lend to consumers and businesses by the Bank of England and Treasury, providing funding at a cheaper rate than being offered by the market. A consequence of the scheme is that banks and building societies are not as reliant on savings deposits to fund their lending and, as a result, they have not needed to attract savings customers with higher rates.
The first Funding for Lending Scheme (FLS) was launched in July 2012 but funds were not available to banks or building societies until August. Another similar scheme, Term Funding Scheme (TFS) was launched in August 2016, which essentially extended the original FLS. As the table below shows, both times these schemes were launched, within six months average saving rates on one and five year fixed bonds and easy access accounts had fallen.
In the first six months of the original FLS launch, the average easy access saving rate had fallen by 0.23%, from 1.03% in August 2012 to 0.80% in February 2013. During this same period, the average one year fixed bond rate fell by 0.81%, from 2.64% to 1.83%, and the average five year fixed bond rate by 1.29%, from 3.79% to 2.50%. Over the six-month period after the second TFS was launched, the average easy access saving rate fell by 0.18%, from 0.55% in August 2016 to 0.37% in February 2017. During this same period, the average one year fixed bond rate fell by 0.23%, from 1.15% to 0.92%, and the average five year fixed bond rate fell by 0.24%, from 1.98% to 1.74%.
|Average saving rates|
|1 Aug 2012||1 Feb 2013||1 Aug 2016||1 Feb 2017|
|One year fixed bond||2.64%||1.83%||1.15%||0.92%|
|Five year fixed bond||3.79%||2.50%||1.98%||1.74%|
As part of its response to the impact of the pandemic on the UK economy, the Bank of England launched another funding scheme, its Term Funding Scheme with additional incentives for SMEs (TFSME), in April 2020. As the above chart shows, previous funding schemes have impacted average savings rates, so the launch of the new scheme may have also impacted rates over the last 12 months.
Clearly, with base rate being cut to a historic low and the launch of a new funding for lending scheme, the last 12 months has resulted in a dismal savings market, but can we expect to see savings rates will rise in the next 12 months?
A lot will depend on what happens to the wider economy, as the pandemic continues to impact businesses and consumers, and whether this results in a base rate rise or further cut. Talk of negative interest rates has quietened down in the last few months, but the Bank of England could still cut base rate further if the economy fails to recover from the pandemic. Alternatively, the Bank of England may look to increase base rate if the economy makes a rapid recovery, which could see savings rates increase as a result, although in the current climate this seems unlikely.
Another big factor is the TFSME, which is set to provide funding for a four-year period. This means that saving rates from high street banks or building societies could remain low for the foreseeable future, as these providers are less reliant on savings deposits to fund their lending.
What could see average saving rates increase in the next 12 months is the impact of challenger banks on the market.
Challenger banks originally started appearing after the 2008/09 financial crisis looking to disrupt the savings market, and many did so by offering higher than average rates, with some regularly offering top-paying accounts. Many of these banks have remained in the market, with some, such as Bank of London and the Middle East (BLME) and Paragon Bank, regularly offering savings accounts at highly competitive rates. There is also the possibility of new challenger banks entering the market or relaunching competitive accounts, for example Marcus by Goldman Sachs® relaunched its easy access savings account recently.
As such, although average saving rates may not rise significantly, if at all, over the next 12 months, savers should continue to check our savings charts as some providers, such as challenger banks, may launch accounts that offer chart-topping rates in order to disrupt the market and attract new savings customers.
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