Why Are Savings Interest Rates So Low?

Author: Samuel Beckingham
Updated: Jun 21, 2023
3 minutes read

Since the Bank of England has been raising interest rates so much in the last year, it should have signalled good news for savers. In actuality, banks have been accused of not passing on the benefits of high interest rates to people with money in the bank. MPs have even pitched in saying that some banks have been worse than others.

Although money has been tighter for households, banks have been trying to achieve higher profit margins as well, causing an additional squeeze for savers. As such, high savings rates have not been passed onto customers. Hargreaves Lansdown has estimated that households are missing out on £23 billion in interest a year.

Back in February, Lloyds Bank, NatWest, HSBC and Barclays were debated in Parliament as their bosses were brought in to defend themselves against such measly interest savings rates. The banks refused to accept they were in the wrong, believing that easy access savings accounts were the centre of the debate. They specified that regular saver deals offered much better rates of interest instead.

The committee who questioned the banks were under the impression that interest rates needed to be much better than current offerings. Rates were seen between 0.7% and 1.35%, which is well under the current base rate of 4.5%. Better rates need to be offered in order to encourage saving. According to UK Finance, total household savings have shrunk year on year for the first time in 15 years.

This essentially means that banks are shortchanging customers by hundreds of pounds a year. In April, the Financial Conduct Authority warned some banks that it could make onerous interventions if they did not raise their interest rates in savings accounts, but the Base Rate isn’t the only factor that affects how high interest rates should be. UK Finance defended the decision of low interest rates from banks by specifying there are other considerations, such as how some borrowers won’t repay their loans in full.

While there are some relatively high interest rates for savings accounts, consumers are expected to shop around for them, causing undue penalties for loyal customers. Some of these high interest accounts come with several caveats and don’t offer relatively easy access to funds as and when you might need them. It should be noted that banks are not obligated to pass on higher interest rates.

Commercial banks have billions in their own accounts with the Bank of England and these amounts are paid the Bank Rate in interest. In the eyes of Frederic Malherbe, Professor of Economics and Finance at University College London, these reserves should only be paid that interest providing the banks have passed on higher savings rates to their customers.

While Malherbe believes the current system is working to dampen demand, the other side of the same coin isn’t working for savers. Instead, banks have been looking to increase their profit margins, which have jumped by 13–24%. Not only is this better for banks, but their executives have been able to take more of a salary as a result.