When savings rates are at 2 per cent and inflation at 2 per cent? That is not an equation that is going to happen for a long time.
One crumb of comfort however, is that a bank rate of 0.5 per cent is likely to prompt the MPC to start unwinding QE and that means some of the downward pressure on savings rates could start to lift.
What about bank shares?
What has happened to the big retail banks’ share prices since 16 December. As of today (January 19):
- Barclays: 19.2%
- Lloyds Banking Group: 23.4%
- Natwest (RBS): 15.8%
- Metro Bank: 26.4%
In comparison, the wider UK stock market has risen by approximately 3.3 per cent over the same period.
Rising interest rates are generally good news for retail banks as it means they can grow the margin between what they earn from loans and what they pay on deposits.
This is achieved by raising mortgage rates faster than savings rates in response to Bank of England rate rises – and that’s what we’ve seen since December 16.
In contrast to the lethargy on savings rates, Santander, Lloyds and Halifax all announced increases to their standard variable mortgage rates by the full 0.15 per cent shortly after the Bank of England’s decision on December 16.
It would be fatuous to say savers would have done rather better to use their savings to buy bank shares on 16 December - taking short term views on shares is risky. But the comparison reveals a kernel of truth.
The UK stock market is quite financials-heavy – with about 17 per cent of the blue-chip index made up by banks and insurers – so British investors don’t have to look too far for an index fund or more active funds that have high exposure to the sector.
Adrian Lowery is personal finance expert at investing platform Bestinvest
