Why don’t banks pass on interest rate hikes to customers? | Interest rate

Millions hurt on savings rates as banks and building societies failed to pass on this month’s 0.5 percentage point interest rate hike, research shows .

What happened?

On August 4, the Bank of England raised interest rates by 0.5 percentage point to 1.75% as the UK struggles to keep inflation from spiraling out of control. This was the sixth consecutive interest rate hike.

In theory, this is good news for the army of British savers, who have been the losers of years of falling interest rates. Many expected to see their savings account rates go up, but the reality has too often been very different.

So what’s the bad news?

Research published on Tuesday found that as of August 15, UK banks and building societies had passed on the full 0.5 percentage point increase to just two of 233 easy-access savings accounts.

At that date, the only provider to pass on the entire increase was the real estate company West Brom, according to the study by the Investing Reviews site.

Suppliers who had given their accounts a sort of boost – that is, passed on some of the increase – included Zopa, Tesco Bank, Atom Bank, Tandem Bank, Skipton building society and Gatehouse Bank, he said.

In total, only 26 easy-access accounts (11.2%) saw any increase in rate paid following the Aug. 4 hike, according to the study.

Should banks pass on interest rate hikes?

Account providers are free to do whatever they want with savings rates unfortunately. They could decide to pass on all, part or nothing of an increase (or decrease) in interest rates.

The good news is that sometimes banks wait a while before changing savings rates – perhaps several weeks or even longer. So – taking a half-full view – just because your account hasn’t seen a rate increase to date doesn’t mean you won’t get an increase.

One expert said: ‘To be fair, it’s a bit early to see any changes in savings… Some brands may only now be catching up with earlier base rate hikes.’

Earlier this year, Rachel Springall of financial data firm Moneyfacts said: “As we have seen time and time again, there is no guarantee that savings providers will raise their rates due to a rate hike in the Bank of England and, even if they do, it could take a few months to trickle down to customers.

On January 23 this year, more than five weeks after the Bank of England raised the base rate from 0.1% to 0.25%, the Guardian reported that only four financial firms had passed on all or almost all of their variable-rate savings account customers.

So some people have benefited from increases in savings rates?

Overall, according to figures released Monday by Moneyfacts, the average rate of easy access rose to 0.7% and is at its highest level in nine years. In August of last year, the average was 0.18%.

So why aren’t providers raising savings rates?

Some experts have previously argued that most big banks are not interested in attracting deposits from savers.

Some would say that banks rely on customer apathy. Some customers will give up looking for a better deal, if they can find one, but many others won’t notice the change or won’t move to move their money.

But is the rise in interest rates obviously good news for savers?

Yes, of course, but unfortunately, even if the latest increase is fully passed on, rising inflation – currently at 9.4% and set to rise – is eroding the value of people’s nest eggs.

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