Life gets worse and worse for savers and depositors

Today sees or by the time you read this the announcement of another Bank of England policy decision. Actually reality has already changed as the vote took place yesterday in one of Governor Mark Carney’s “improvements”. He preferred the PR spin of presenting the announcement and the minutes together against the real and present danger of some traders being more equal than others. Presumably just like the apocryphal civil servant Sir Humphrey Appleby he feels that those with the knowledge are “one of us” and can be trusted with it. Of course in that episode of Yes Prime Minister Sir Humphrey was shocked by the defections to Russia and we know that central banks leak “like a sieve” as Jim Hacker put it.

That may particularly matter today if it turns out that someone has voted for a Bank Rate cut or other form of policy easing. We are in a zone now where with production and manufacturing looking rather recessionary and the latest Markit Purchasing Managers Index suggesting a quarterly economic growth rate of 0.1% one or two will be mulling that. Perhaps the fact that the NIESR suggested a quarterly growth rate of 0.3% yesterday will make them hold fire for now but it brings me to the point at issue today which is to look at a major implication of the Bank Rate being at an “emergency” rate of 0.5% since March 2009.

Savings Rates

Even the BBC has noted that there has been changes in this area. This is because even worse than flatlining like the 0.5% Bank Rate they have been consistently falling.

Interest rates for savers have fallen to new record lows, after hundreds of cuts in recent months and more than 1,000 in the past year.

And again.

Savings rates plummeted after the Bank of England slashed its base rate in the financial crisis. Since last autumn, as the economic outlook has worsened, they have fallen again……In research carried out for the BBC, the rate-checking firm Savings Champion recorded 1,440 savings rate cuts last year and more than 230 so far this year.

So “The heat is on” to quote the late and sorely missed Glen Frey. Indeed it is the much trumpted ISAs which have been leading the charge in the wrong direction.

Tax-free Isa rates are at their lowest ever. The average variable rate Isa is down to 1%, while a typical fixed-rate Isa pays 1.4%.

Savers amongst you may well be having a wry smile thinking that we have been allowed to put more into ISAs like that just as they have become less valuable! That does remind me of the plans of Sir Humphrey Appleby in Yes Prime Minister.

Along the way the BBC has uncovered a real nugget but sadly it mostly misses the significance of it.

The average return from the five best easy access accounts has dropped from more than 3% in 2012 to under 1.3%.

This is because the Funding for (Mortgage) Lending Scheme began in the summer of 2012 and the £69 billion or so of cheap funding provided by the Bank of England pushed mortgage rates lower. As it did so this meant that the banks had less need for ordinary deposits meaning less competition and lower deposit or savings rates have followed over time. More recently that existing trend has been added to by the way that interest-rates have fallen elsewhere such as the -0.4% deposit rate of the European Central Bank or the way that bond yields in Germany are negative out to the 9 year maturity. An illustration of this is the way that the 2 year UK Gilt (government bond) only yields some 0.36% which of course is below the Bank Rate which is not only embarassing for the Forward Guidance of Mark Carney it provides little help and succour for savers.

Financial Repression

This is defined by the Financial Times lexicon as shown below and the emphasis is mine.

Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers.

Back in September 2010 a right Charlie told us this as Mr.Bean took to the Channel 4 airwaves.

“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

As you can see discouraging saving and financial repression was at the top of Charlie’s agenda. Indeed he went on to give some Forward Guidance that is as hapless as the more recent versions.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

So far he was completely wrong or of course he was singling along to the lyrics of Pete Townsend.

I can see for miles and miles and miles and miles and miles

Savers may be thinking of another line from that song for Charlie’s benefit.

I know you’ve deceived me, now here’s a surprise

As the car crash interview continued the Deputy Governor had more to say on the subject.

Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn.

Perhaps he thought he was suffering by getting by on a salary of £252,947 per year. Also there is not much sign of Charlie suffering in a pension worth a minimum of £4.85 million ( I have ignore spouse benefits etc for simplicity). Also he gets thrown some extra treats every now and then like his Review of UK Economic Statistics. So it would appear that a man who might be considered “one of us” by the establishment is immune from the suffering his and their policies have inflicted on others.


There are quite a few themes at play today. Firstly the driving force behind this is the central banking effort to boost asset prices such as house prices and equities. Lowering market interest-rates gives them a double whammy as the explicit move of lowering mortgage rates is added to by the implicit one of lower savings returns leading to less saving. Actually as ever life is much more complex than in the central banking 101 play book as for example many choose to pay their mortgage down faster by such methods as overpayments and repayments in 2016 have averaged just under £18 billion per month so far in 2016. Others adjust to lower savings rates by saving even more.

There is also the issue of timing as savers were promised a brighter future by Charlie Bean. Yet rather than being brighter the storm clouds have gathered and the situation has got worse.

If we spread our net wider we see that in an interview with Bild last month Mario Draghi of the ECB was humming the same song.

People can influence how much they get on their savings even in times of low interest rates. They don’t just have to keep the money in savings accounts but can invest in other ways.

But there are alternatives when investing savings. In the United States savers had to face seven years of zero interest rates.

Rather oddly the possibility of the UK leaving the European Union has been presented as a possible olive branch for savers by the new Bank of England policy maker Michael Saunders. From the Daily Telegraph.

The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.

As this might well encourage savers to vote out Mr.Saunders may well be aping Bart Simpson right now as he stands in front of the Bank of England blackboard writing ” I must not…” a thousand times




30 thoughts on “Life gets worse and worse for savers and depositors

  1. Savers have lost spending power upwards of £2bn per month over the past seven years or so, a total around £170 BILLION!
    If savers had spent this, what would have been the effect on GDP and jobs?

  2. I have a five-year ISA maturing this month. I can hardly believe it, but the fixed rate was 5%. The renewal offer is, I think, 1%. The same company has sent me an offer of a mortgage today at 3.5%. This really is quite a change from savers to borrowers in five years flat!
    In terms of getting an interest rate of 3.5% if we exit the EU, I would say that this is pretty theoretical, as we have been told that, if that happens:
    1. World War Three will have started by then;
    2. We will have lost 3 million jobs;
    3. We will not be able to export any goods to the EU;
    4. The pound will have collapsed;
    5. The special relationship will have ended and we will be sent to the back of the queue (line?)
    War and poverty have been promised to us. Just famine and pestilence to go for the full set.
    Savings rates will be the least of our worries if we believe our politicians (a big if…)

  3. “Perhaps he thought he was suffering by getting by on a salary of £252,947 per year. Also there is not much sign of Charlie suffering in a pension worth a minimum of £4.85 million”

    Isn’t strange that TPTB, are not subject to the rule that caps a pension pot at £1 million! No need for him to save!

    • Someone calculated years ago that an MP had a pension worth more than the salary cap after, I think, 8 years. Can anyone remember the exact figures for this and whether MPs still get final benefit schemes?

    • Hi Foxy

      I can help out here in the case of Deputy Governor Bean.

      “A part of this was provided in Mr Bean’s case
      by an unfunded scheme, set up for executives
      who were subject to the pension earnings cap
      introduced in the Finance Act 1989. Provision for
      these unfunded benefits is made in the Bank’s
      financial statements. “

  4. Great blog as usual, Shaun. I wasn’t aware that Mr. Saunders had been added to the MPC so thanks for telling me about that. I added a rant to the FT article on Mr. Saunders being appointed that appeared on April 15 if you or anyone else in your part of the blogosphere is interested in reading it. The gist is that all Carney appointees to the MPC seem to be at peace with the idea of making the CPIH the one index that rules them all and in the darkness binds them.

  5. Given the bank’s forecasting record on everything else, Carney’s warnings today make a convincing case for Brexit.

    • They overpay Carney.I’d have sat on my hands and achieved the square root of nothing for a fraction of what we’ve paid him.

      Forbin might even do it for popcorn.

      I’m stunned that these parasites have the gall to take a slary let alone an inflation proof pension

      • Hi Dutch overpaid?This man controls the economy the way Mr Corbett controlled Sooty all for a fee that most premier league footballers would consider to be low pay.
        You should be more grateful that this financial guru has decided to bring his forward guidance to these shores.
        No more insubordination in the ranks or he may take his monetary magic and financial repression wand away to impoverish savers and pension schemes in other lands.

  6. Rates have to be low- we can’t afford even reasonable rates because it would collapse the Ponzi. The only way rates will go up is if they are forced up, most likely by a sterling crisis. We will carry on this idiocy until we crash.

  7. We’ve covered this loads in the comments on here,but they really are clueless.Has it ever occurred to them that by forcing savings rates down people will actually save more?

    Clearly not.But the evidence shows that they do.

    All good for public sector pensioners like our political class but it’s jack for Joe Public trying to raise his kids and provide for himself and his Mrs in old age.

    Their honest to God-almost surreal solution-(and please correct me if I’ve read this wrong)-is to drive savings rates low,so people spend more,and then all the extra growth will provide for them in their dotage………….

    • Hi Dutch

      Somehow they seem to have believed their economic models when reality was telling them something different. I can understand that for a period of time as you have to test things but some aspects of those flawed models are still in place and that is unacceptable.

      Well the extra growth will pay for the establishment in their dotage.

  8. ” central banking effort to boost asset prices such as house prices and equities ”

    so after all this time and money the pratical upshot is that the Banks are still bust ?

    thought that was all going to be hunky dory by 2018 – a mere 19 months away

    as a stop gap measure it worked – but just like the US invation of Iraq there was no plan to back out . 1930’s style recession was avoided but we ended up still in a recession of sorts but with costly assets thrown in – no reset

    and yet even if we Brexit – nobody knows for sure that our rates will rise – not even the BoE is certain 😉


    sit back and enjoy the popcorn – at least it not imputed !

    • Hi Forbin

      I for one am glad you have scotched the rumours that you enjoy imputed popcorn :). As to the banks I wonder if the 2018/19 rules will ever apply a bit like the ones for bankers which George Osborne watered down a few months ago. It is all very Sir Humphrey Appleby where by the time anything applies he hopes the reason why will have been forgotten.

  9. Hi , I found this a very interesting read. Will be following your content for many months to come!!!

    I am a successful fashion entrepreneur. However, I have extensive experience in financial markets and I wrote a similar blog post to this one about 3 factors that really hurt everyday savers and investors and the public.

    It may be of interest to those readers that really want to know the inner workings of public and general finance.

  10. In the words of my dear old grandfather – much more of this and we will have a revolting population! (a reaction to Selwyn Lloyd’s 1961 “pay pause”).

    It is, Shaun, an utter shambles. And I’m very pleased this blog is determined not to let Charlie Bean forget he was part of the team that led the country down this dead-end road to financial repression.

    • Hi Eric

      Thanks and I am still in hot pursuit of Adam Posen too. Only last week he wrote something at PIIE saying he was “proven right” on UK inflation when of course he left the MPC because he got it wrong. Easy concepts to confuse apparently!

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