What Covid-19 means 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.