1.3.6 Case study: whatever happened to UK savings rates?

A major development that affected millions of investors in the UK after 2007 came with a fall in interest rates paid on savings accounts.

The audio and the supporting graphics in the video below set out the decline which resulted in investors earning less than the prevailing rate of price inflation with the consequence that the real value of their savings ended up being reduced. The causes of this development are explained in the audio.

The episode is both a classic case of macro-economic policy having both winners and losers and of the realities of inflation risk on investments. Faced with such meagre returns many investors turned to alternative investments to boost their income – but in so doing took on a variety of alternative investment risks.

While the audio covers events in the first half of the 2010s the issues it identifies remain relevant today. The general level of interest rates is determined by the Bank of England’s official rate (Bank Rate) and the returns that savers can expect are therefore inevitably influenced by those economic factors that determine Bank Rate – principally the levels of price inflation and economic activity in the UK.

Download this video clip.Video player: ou_futurelearn_mmi_vid_1023.mp4

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Transcript

MARTIN UPTON

This animation looks at the changes to UK saving rates since the financial crisis in 2007 and 2008. So the story starts with the 2007/ 2008 financial crisis and the attempts by the Government and the Bank of England to try to ensure that the resultant economic downturn was neither too deep nor prolonged. This led to cuts in the official rate of interest for the UK to a record low of 0.5% in March 2009. Understandably this pushed down the general level of interest rates on savings products, ... including those rates on new fixed-rate bond offers, but for most of the next four years savers still received interest on their accounts comfortably above the official rate of 0.5%. This was helped by the fact that, at the time, many financial institutions were struggling to access funds from the wholesale markets at a reasonable cost. As a consequence they turned to the savings market and had to pay up for 'retail' funds from the public. This helped savers until 2012, when the Bank of England introduced their Funding-for-Lending Scheme (or FLS).

This scheme offered banks, and other lenders, access to cheap funds costing as little as 0.25% per annum - to encourage greater lending to businesses and households. Unsurprisingly, financial institutions piled in and accessed some £42 billion of funds over the next two years.

Now that there was now much less need to draw in retail money from the public - equally unsurprisingly - the rates on savings accounts were slashed to record lows. And until 2015 most savings rates were below the level of inflation. While this was great news for borrowers it was disastrous for savers, many of whom rely on interest on their savings to top up their pension incomes.

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