The long wait
Does the recent rise in interest rates give cash savers cause for optimism?
Cash savers are now well used to their status as casualties of the monetary experiment that has followed the global financial crisis.
In the desire to help them achieve better returns, the City regulator, the Financial Conduct Authority, has previously tried forcing banks to tell customers how to switch their savings accounts. It has also tried naming and shaming those paying the worst rates. Yet none of these measures has made much difference.
Its latest proposal is for banks to set a minimum ‘basic savings rate’ on their savings accounts. The primary concern is over the large number of savers who leave money languishing in old accounts paying the lowest rates of interest – 33% of accounts were opened more than five years ago.1 It estimates these savers are missing out on up to £480 million in interest each year.
The regulator’s latest idea was proposed shortly before the much-anticipated 0.25% rise in interest rates announced on 2 August. Providers will be watched closely over the coming weeks to see if they pass on the increased rate in full to savers.
Whatever happens, during the last decade, cash savers have increasingly had to resign themselves to the fact that their money is failing to achieve the basic objective of maintaining its spending power. Of the 1,801 savings products available in July, just 24 accounts offered a rate that matched or beat inflation. Notably, not one was a Cash ISA.2
Interestingly, the average no-notice Cash ISA rate actually fell in July, for the first time since last November, reflecting a lack of emphasis on this sector amongst providers.3 Consumers appear to be similarly apathetic; the lingering effects of the Personal Savings Allowance have seen Cash ISA subscriptions remain subdued, according to figures from the Bank of England.4
In contrast, and despite the low returns on offer, savers have been piling money into no-notice accounts, reluctant to lock away their money in anticipation of the base rate rise. Last month’s £3.6 billion was the highest inflow seen since October last year,5 suggesting that savers are more concerned about accessibility than the rate they’re getting.
“The average no-notice rate hit a two-year high of 0.51% in July, matching the level set just before the interest rate cut in August 20166," says Phil Woodcock, Head of Investment Communications at St. James’s Place. “However, it is telling just how long it has taken to reach this mark, given that the base rate was last hiked in November 2017. How quickly, and to what extent, providers reflect this latest rise will determine how far savers’ fortunes improve.”
Recent history gives little cause for optimism. Since last November’s hike (of the same 0.25%), the rate paid by the average no-notice account has increased by 0.06%; adding just 60p to the annual return for every £1,000 deposited.7
It looks like the road ahead for cash savers will be a long and challenging one. The market is currently pricing in only one more rise of 0.25% next year, and another in 2020.8 But this forecast assumes a relatively benign outcome from the Brexit negotiations.
“In a negative scenario, such as a hard Brexit or no deal, it’s likely that those rate rises will be off the table,” comments Woodcock. “Indeed, rates could be cut again, as happened after the referendum in 2016; the latest rise certainly gives the Bank of England more scope to do so if chaos ensues.”
As the era of record-low interest rates enters its second decade, savers preferring the perceived safety of cash continue to put their long-term financial security at risk.
The value of an ISA with St. James’s Place will be directly linked to the performance of the underlying funds selected and may fall as well as rise. You may get back less than you invested.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA, or a deposit account with a bank or building society.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
1 Financial Conduct Authority, Price discrimination in the cash savings market, July 2018.
2,3,4,5,7,8 Moneyfacts, UK Savings Trends, July 2018.
6 BlackRock, UK weekly commentary, 6 August 2018.