Why Did Big UK Banks Fail to Pass on Interest Rates to Savers?

On Thursday, 2 November 2017, the MPC of the Bank of England voted by a margin of 7-2 to raise the bank rate by 25-basis points. This long-overdue decision was roundly applauded by financial markets, and the bank rate promptly rose to 0.50%. The impact of a bank rate hike is particularly important to the greater economy. For starters, higher interest rates increase the burden on households currently swamped in debt.

UK household debt levels are at historic highs, and an increase in the bank rate only adds to that burden. For example, The Guardian reported that 2017 debt in the UK is up 7% from 2012 debt. At £1,630.1 billion, the composition of total UK debt is comprised of £1,332.3 billion of mortgage debt, £100.5 billion of student debt, and £197.3 billion of consumer credit. These debt levels have been driven by a swift increase in unsecured debt, notably payday loans, credit card debt and personal loans which are up sharply since 2012 (19%).

According to the Bank of England, between July 2016 and July 2017, consumer credit levels spiked 4.9%, after inflation is accounted for. Riding the wave of rising debt is car finance debt, which has also doubled over the past 5 years. Mortgage-related debt has increased by 2% since 2012, substantial given the huge base that it started from. Unfortunately, the greatest increase in overall household debt comes in the form of increased student loan debt which is approximately double what it was 5 years ago.

These statistics may not mean much to the unsuspecting eye, but to the average UK household they are vitally important. For starters, debt levels are rising owing to higher than expected inflation. In September and October 2017, UK inflation was recorded at 3% while real wage growth was just 2.2%. This gap explains why more personal disposable income is being eaten up by rising prices. People are unable to put money away for savings purposes, given that they are being forced to pay more for the same goods and services they consume daily. Brexit pressure is being brought to bear, and this is evident in a weaker GBP (GBP/USD is struggling to maintain the 1.3200 level), and diminished returns on sterling purchases.

UK Banks Evoke the Ire of Customers

When the MPC announced the 25-basis point rate hike a few weeks ago, there was hope that banks would pass on the higher interest rate to savers. Unfortunately, several leading UK banks (6 of them in total) applied what can only be considered selfish practices by not offering higher interest rates to savers.

That the same banks immediately increased the interest rates on money they lent out is notable. It should be pointed out that it wasn’t only banks like HSBC, Lloyd’s, RBS-NatWest, Barclays and Santander that failed to act, it was the government’s very own National Savings and Investments too.

When bank management and officials were contacted for comment, they responded by saying that they were reviewing the situation. Unfortunately, several of these banks were quick to raise the costs for homeowners without making the necessary adjustments for savers. Various finance consultants, including Forex trading expert Michael Johnson from Olsson Capital have been urging UK banks to act swiftly on parsing the interest rate hike on to savers. According to Johnson,

‘…tight economic conditions in the UK warrant action on the part of regulators and big banks to help Britons. The volatility of Brexit stresses has many people deeply concerned. While unemployment may be at a 42-year low, job security is a major concern, and rising household debt is pressuring the already lean revenue streams of UK households. We expect big banks to act swiftly and help out wherever possible.’