The word 'unprecedented' has been overused in the past two months but these are truly extraordinary times in the savings market. The last couple of days of last week saw some truly remarkable activity in the savings market with a host of providers changing rates. Other than PCF Bank relaunching their 3 Year Fixed Rate, all the pricing movement was downwards. Here's a summary, by product category, of the changes, to put some context to their sheer volume of rates which have been cut:
* Aldermore cut their rate from 1% to 0.80%
* Shawbrook reduce from 1% to 0.75%
* Close withdraw their 95 day notice 1.35%
* Paragon reduce their 120 Day notice from 1.20% to 1.05% and 45 day notice from 1.10% to 1%
* Gatehouse Bank drop their best buy 1.50% to 1.25%
* Hodge Bank cut from 1.34% to 1.20%
* Ikano reduce from 1.36% to 1.21%
* Paragon drop from 1.25% to 1.10%
* Zenith Bank reduce from 1.43% to 1.15%
* SmartSave cut from 1.40% to 1.35%
* Gatehouse drops from 1.60% to 1.35%
* Hodge Bank cut to 1.25%
* Ikano drop from 1.46% to 1.31%
* Paragon reduce from 1.40% to 1.25%
* Shawbrook reduce to 1.25%
* Zenith Bank cut from 1.53% to 1.30%
* SmartSave cut from 1.45% to 1.40%
* Gatehouse reduce their best buy from 1.75% to 1.45%
* Hodge Bank cut to 1.30%
* Ikano drop from 1.56% to 1.41%
* Paragon reduce from 1.50% to 1.30%
* PCF relaunch at 1.50%
* Shawbrook Bank reduce from 1.68% to 1.30%
* Zenith Bank cut from 1.57% to 1.40%
* Gatehouse reduce their best buy from 1.85% to 1.55%
* Ikano drop from 1.71% to 1.56%
* Paragon cut from 1.60% to 1.40%
On top of this, Charter Savings, Gatehouse, Hampshire and Principality all cut or withdrew ISA rates too. Of the ten providers in our 1 Year table, only Atom Bank and BLME (Bank of London & Middle East) remain as they were. All other providers have either cut been promoted in to the tables due to the rate changes.
There are a number of reasons why this is happening. There's been a drop in lending activity which these savings book fund, the new TFSME (Term Funding Scheme for Small & Medium Enterprises) has started to be drawn on by some banks and the Bank of England Base Rate has been cut. However, fundamentally, we are now in a vicious circle where providers are cutting in response to other movements, which then triggers other banks to respond, to avoid getting over liquid with savings. The upshot is, everyone moves! That's ultimately where we got to at the back end of last week where it was possible to see that both the timing of the change, and the rates being moved from/to, in many cases were clearly a reaction not a scheduled change.
The question which savers want to know is where is it going to end. Longer term, that's incredibly hard to predict but short term it is very clear. We are in for more of the same. However, there will be a floor and government owned National Savings & Investments is going to provide that floor. It had a round of planned rate cuts which were due to take place on 1st May. They were pulled in light of Covid-19 and this has now seen their Direct Saver (1%) enter the easy access best buys and, if you class their monthly interest paying Income Bonds (1.16%) as an easy access account, Income Bonds top it.
NS&I works differently to banks and this is going to provide the floor to stop further falls in the short term. In easy access, I expect the position to remain broadly as it is with best buy rates around 1%. For 1 Year Bonds, I expect a fall back towards 1.20 - 1.25%, 2 Year around 1.35%, 3 Year at 1.45% - 1.50% and 5 Year around 1.60%. NS&I don't have a regular scheduled date to review rates so it is impossible to know when they will recommend reductions but, they give two months notice of changes to rates so we are looking at August at the earliest for any cuts. While I expect there will still be much movement and jostling for position, I don't foresee the headline rates changing significantly i.e. the providers may change but expect those best buy rate levels to hold, regardless of which provider is paying those rates.
What do I expect to happen next? BLME now sit top of all bar 5 Year Fixed Rate Bonds so I expect a re-price of their range, in response to the changes. Atom's 1 Year at 1.40% looks unsustainable and I expect that to be cut by the end of the week, by at least 0.15%. Wyelands can also not maintain their 1.30% price point and will cut too and expect Habib Zurich to make yet another cut to their 1 Year too. I don't think we will see anything near Atom's 1.40% or BLME's 1.45% anytime soon so 1 Year savers should secure those while they can.
RCI's 5 Year rate of 1.80% is a historical low for 5 Year savings but this current best buy pricing will look generous by the end of next month. While I cannot recommend locking away money at that price for 5 Years, it will look very competitive to what will be there in the coming weeks.
There will be more volatility in the coming days and weeks but this will stabilise as rates settle around these price points. My advice to savers is secure these rates while you can.
Marcus by Goldman Sachs have announced a cut of 0.10% to their best buy easy access account this morning. Hot on heals of its 2020 Q1 results announcement, which showed it has grown to over 500,000 savers in the UK with balances totalling more than £17bn, the bank cut its rate to new customers to 1.20%. Existing customers received notification that the rate on their accounts will reduce to 1.20% from 7th May.
Kent Reliance cut its own easy access rate from 1.20% to 1% this morning too, ahead of the change from Marcus, and Paragon have cut their 1.21% rate to 1% for new customers. These moves all follow Virgin Money's pull back from its best buy of 1.31% to 1.01% last week, in what has been a bonfire of rate cuts for easy access savers.
Ford Money were due to relaunch their flexible saver this morning, but this was pulled however not before coverage of the move appeared alongside the Marcus cut. Its reentry to market will have been welcomed by savers, but the move is understandable in light of competitor pricing movements.
All eyes are on Aldermore Bank now, who sit top of the easy access tables with their 1.25% rate. Although Aldermore, which launched in 2009, now looks after over £10bn of savers deposits, we don't anticipate that it will hold this position for long and expect it to pull back by the end of next week. Savers likely have a short window of opportunity to secure this rate as we expect any new issue to be priced around 1.15 - 1.20%.
With Marcus, Saga, RCI and Investec all priced at 1.20%, and Shawbrook tucked in behind at 1.15%, there's some support at this price level. If Aldermore do drop in to that range and Ford Money re-enter the market, this will further bolster this. However, there's precious little between this and a clutch of providers priced around 1%. Any further downwards movements from this group is likely to trigger further falls towards 1%.
What will be interesting to see is if these price falls trigger a renewed interest in cash ISAs, which have waned in popularity with the advent of the personal savings allowance and pricing typically being lower than their ordinary counterparts. However, with Shawbrook Bank, Bath and Penrith Building Societies all paying 1.25%, easy access cash ISAs now look a much better bet for savers.
In normal circumstances, savers have a keen interest in the budget. Will there be new schemes or incentives to save? Will Individual Savings Accounts (ISA) or Personal Savings Allowances be increased? What does the Treasury have in store for National Savings & Investments and will that be good/bad news?
Rishi Sunak’s first budget as Chancellor of the Exchequer was possibly the most underwhelming for savers in recent memory. In fact, other than a (pretty significant in fairness) increase in the Junior ISA allowance from £4,368 to £9,000 buried in section 1.171 on page 51 of the Budget 2020, there was nothing.
The real news for savers had already come earlier in the morning from the Bank of England, in a package of measures to support the economy in the wake of Covid-19. These were three-fold:
1) Reducing the Bank of England Base Rate from 0.75% to 0.25%
2) Launching a new Term Funding Scheme (TFS)
3) Releasing the UK Countercyclical Capital Buffer
None of these moves were good news for savers. Firstly, although interest rates on savings have long decoupled from base rate, a half a percent cut in base rate isn’t going to do anything to increase rates on savings.
Secondly, the Term Funding Scheme has been launched to provide ‘in excess of £100bn’ to banks in term funding to support small and medium sized enterprises (SMEs). It’s a move the Bank of England has made recognising that there’s little scope for banks and building societies to reduce rates on savings much further so is designed to provide them with cheap money to lend to SME’s.
The jury is out on whether previous schemes have helped UK business significantly or have been used to provide banks with cheaper funding for loans they may well have largely made any way. Many personal finance commentators blame the previous TFS and its predecessor, the Funding for Lending Scheme (FLS), for poor savings rates. While they undoubtedly didn’t help savers, I don’t believe they are solely to blame for the rates on offer to savers. What’s clear though is that the new TFS isn’t going to give banks any incentive to increase rates on deposits.
Thirdly, releasing the countercyclical capital buffer will free up to £190bn to banks to lend to businesses. This is money that banks won’t now need to attract from savers and is significant as this figure represents circa 11% of the £1.7tn UK savings market.
All in all, not much to cheer about. Unfortunately, looking ahead, the news doesn’t get better for savers. What has held savings rates higher than they otherwise would have been, is the flood of new entrants to the market, who have offered best buy rates to gain a foothold. This has also forced other smaller providers and new entrants to compete on interest rates to attract savers. While savers might bemoan rates, they’d be much lower were it not for the plethora of new entrants that the market has seen.
Over 20 new bank licences have been issued, and approximately 50 new savings providers in total have joined the market in the past decade. While new licences have been thin on the ground recently, there’s an influx coming. Allica, Oxbury, revverbank, Vive and Zopa are all licensed but yet to launch to the market. B-north, Castle Trust, Distribution Finance Capital, Lintel and Recognise are known to have submitted their licence applications and expecting to gain authorisation in Q2 2020 and there are more that I can’t name.
In theory, this should be good news for savers – new banks paying attractive rates to bring in savers. In reality, Covid-19 is likely to delay the launches of some, as teams are forced to work from home. It could well impact on the ability of those prospective new banks seeking capital to fund them through to launch and profitability – both by making investors more cautious and more practically by impacting management teams being able to meet investors. Brexit certainly slowed the pace of authorisations and Covid-19 could well impact the Bank of England’s New Bank Start Up unit too.
In the past week, the savings market has lost best buy rates from Bank of London & Middle East, Ford Money, Habib, Ikano and United Trust Bank. It’s hard not to see that trend continuing and a further fall bank in rates to come.
With global stock markets turbulent, we may see more money move from equity investments into cash savings, which will do little to help rates, as history shows that investors behave irrationally in times of volatility i.e. selling at market low points.
There are few glimmers of hope but those looking for signs of optimism will have been buoyed by Smartsave Bank bucking the trend and launching a best buy 1 Year Fixed Rate Bond. I’m also in the school of thought that rates are at such a point that there’s limited room to fall much further. While I expect some pull back from these levels, I’m not expecting drops in line with those witnessed in the FTSE in recent weeks. Finally, despite the influx of new entrants there’s still considerable interest from prospective new banks and I think the market has a way to go. If we can get past Covid-19 in the next few months, there’s hope for savers later in the year.
Stay safe savers.