In the wake of rising interest rates, a top UK financial regulator convened a meeting with major banks, urging them to explain the significant disparity between the rates on savings accounts and the central bank's main interest rate. According to CNN, consumer rights advocates and lawmakers suspect that banks are profiteering at the expense of savers, who are not reaping the benefits of higher returns on their deposits.
This issue is not unique to the UK. In both Europe and the United States, despite aggressive rate hikes to combat inflation, interest rates for savers have remained disappointingly low. The average savings account in the US, where benchmark borrowing costs range from 5% to 5.25%, yields a paltry 0.42% in annual interest. In contrast, the cost of a typical 30-year fixed-rate mortgage has surged to 6.71%.
Similarly, among the 20 eurozone countries, the average instant-access savings account provides a meager 0.21% annual interest, while the average mortgage carries a 3.44% charge.
Financial Regulator Demands Answers from Banks on Lagging Savings Account Rates
In the United Kingdom, the average instant-access savings account earns 2.42% interest, less than half of the Bank of England's official rate of 5% and significantly below the 6.47% interest levied on the average two-year fixed-rate mortgage.
Critics argue that banks are taking advantage of the widening gap between the rates they offer savers and the rates they charge borrowers, thereby fueling accusations of greed. UK Finance, which represents the country's banks, denies profiteering allegations and asserts that savings rates are determined by various factors, not solely the central bank's rate.
By keeping savings rates low, banks have been able to boost their own profits. During the period of ultra-low interest rates, banks operated on thin margins between savings rates and mortgage deals. Now, as interest rates rise, they are taking advantage of the opportunity to maximize their returns.
Banks Deny Profiteering Claims, but Savers Withdraw Funds in Search of Higher Returns
Unsatisfied with the current state of affairs, disgruntled savers are opting to withdraw their funds. In the US, cash deposits at commercial banks have declined by 2.2% since the start of the year, while the value of deposits in the euro area has fallen by 1.2% during the same period. In contrast, money market funds, which offer higher returns than most savings accounts, have seen a significant increase in flows, with the top 100 US funds averaging an annual interest rate of 4.94%. In the UK, households withdrew a record £4.6 billion ($18.5 billion) from banks in May, with withdrawals from instant-access savings accounts more than doubling compared to the previous month.
Financial experts suggest that savers are seeking better returns and are turning to alternative investment options like money market funds. The widening gap between the returns offered by these funds and traditional savings accounts has led many investors to feel dissatisfied and compelled to explore higher-yield opportunities.
As savers continue to express their discontent and withdraw their funds from banks, financial institutions face growing pressure to address this issue. The expectation is for banks to bridge the gap between savings rates and interest rates on loans, providing savers with fairer returns on their deposits. Only time will tell if banks will heed these calls and take steps to rectify the discrepancy between savings and loan rates.
