Britons will hang on to some of their lockdown savings habit in 2021 but in a blow for cash savers the base rate could stay at an all-time low for another two years, the Bank of England said yesterday.
In its latest monetary policy committee report the central bank forecast the base rate could inch up to 0.3 per cent only in the second three months of 2023, later than previously predicted.
Policymakers cut the base rate, which influences borrowing and savings rates, to an all-time low of 0.1 per cent in March 2020 as the coronavirus pandemic upended the UK’s economy.
The Bank of England unveiled its latest forecasts for the UK economy on Wednesday
Last May it forecast the base rate would stay at that level until 2022, at which point it would increase to only 0.2 per cent. However, having once again held it at 0.1 per cent, it has now pushed that timetable back for another year and said it could increase to 0.3 per cent by the second quarter of 2023.
Prior to the financial crisis of 2008 the base rate, which is what commercial banks earn on reserves held with the Bank of England, averaged 5.1 per cent. However, since then Britons have been used to the base rate being below 1.
Although savings rates have long been decoupled from the base rate, due in part to other Bank of England recession fighting measures like cheap funding schemes, no increase for two more years gives major banks little incentive to raise the rates they pay savers.
The central bank confirmed again yesterday that the nation has collectively saved more than ever before during multiple lockdowns, and will likely continue to do so.
The household saving ratio, which is the percentage of disposable income households put away, reached an all-time high of 16.3 per cent last year, according to the Office for National Statistics, including a staggering 25.9 per cent between April and June.
The forecast from the MPC suggested the ratio for 2021 would be 12 per cent, or £1.20 out of every £10 of disposable income. After 2020, this would make for the highest proportion since 1995, when households put away 12.8 per cent of their disposable income.
How do you get up from an all-time low? The Bank of England forecast its base rate could inch up from its current all-time low only in 2023
However, this is down from 15.75 per cent forecast in the last MPC report in February, as the Bank of England increasingly believes the nation is set for a post-pandemic spending spree.
It said households will spend 10 per cent of the more than £100billion they have collectively accumulated since February 2020 by 2023, up from 5 per cent.
The savings ratio could actually fall below pre-pandemic averages to 6 per cent as a result, although this could also be due to a fall in post-tax income, some suggested.
Last year households saved more than £1.60 out of every £10 in disposable income, an all-time high
Meanwhile, close to 25 per cent of adults are expected to spend at least some of their lockdown savings, up from 10 per cent polled by the Bank of England in the second half of last year.
Despite this, around three in five still plan on holding onto the excess cash in their bank account.
Alistair McQueen, head of savings and retirement at Aviva, said the forecasts should be treated cautiously.
‘The uncertainty about future interest rates cannot be overstated’, he said, pointing to central bank projections for inflation which range from -1 per cent to 5 per cent. A sharp increase in inflation could lead to a hike in the base rate.
More households are expected to spend their lockdown savings but the vast majority still plan on holding onto them
He added: ‘Saving behaviour has become disconnected from its normal association with interest rates. Cash saving has boomed over the past year, despite record low rates.’
And while rates remain at close to all-time lows, things have been trending in a more positive direction.
New banks including DF Capital and Oxbury Bank have launched and are offering attractive rates to savers, while Marcus Bank’s return to the easy-access and Isa markets has also helped push up rates.
There have been a raft of best buy easy-access and fixed-rate deals launched in recent weeks as a result, despite the record low best buy rates, and if the economy continues to rebound it could push demand for lending up further.
In return, smaller commercially-focused banks could require more deposits from savers, pushing up rates at the same time.
James Blower, founder of The Savings Guru and an adviser to savings banks, said: ‘We’ve got a great price war going on for savings which is pushing rates up’.
But this only applies if savers make the most of their money and don’t leave it languishing in a bank account paying as little as £1 on every £10,000 of savings, which is what Britain’s major high street names offer.
‘Shop around is still the best advice for savers’, Mr McQueen added.
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