Britain’s biggest banks are under pressure to pass on higher interest rates to savers after figures showing they have made an extra £7bn by refusing to do so, my colleague Richard Partington writes.
On the day the Bank of England is expected to announce a further rise in interest rates, the Unite trade union said banks had already made billions of pounds in extra profit from the dramatic rise in borrowing costs.
Banks make money by charging higher interest on loans than deposits, using the central bank base rate as the reference point. However, the industry has come under fire from across the political spectrum for passing on the rise to borrowers amid the cost of living crisis at a faster rate than for savers.
Stepping up the pressure on the banking industry on Wednesday, the powerful Treasury committee of MPs said it was writing to the City watchdog, the Financial Conduct Authority, to suggest it should look at the issue.
Harriett Baldwin, the Conservative chair of the committee, said:
“While consumers should continue to shop around for the best rates, the information we’ve received from the UK’s biggest high street banks demonstrates there is much more that can be done.”
Barclays, HSBC, Lloyds Banking Group and NatWest Group were forced last month to defend rates of less than 1.3% on their easy-access savings accounts, despite the Bank of England base rate rising to 4%.
The Bank of England is caught between the threat of prolonged high inflation and the risk of “a continued slump in economic growth and/or a potential financial accident,” says Oliver Blackbourn, portfolio manager on the Multi-Asset team at Janus Henderson Investors.
The Bank of England will hope that it can avoid such a situation in the UK, but it needs to weigh this risk against the cost to the population of potentially prolonging the squeeze in the cost of living. The Bank needs to tread a very narrow path as increased borrowing costs really start to bite but inflation remains well above the 2% target rate. Its latest projections put inflation at 3.9% at the end of 2023 but 1.0% in the middle of 2024.
Being able to look through the current high level of inflation can only be deemed an appropriate reason not to raise interest rates significantly further if inflation can demonstrably be seen to be moderating. Today’s data will bring that into question.
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
With inflation worryingly high, and the banking system in turmoil, these are difficult times for central bankers.
And today, the Bank of England will reveal whether it had pushed up UK borrowing costs again, or left interest rates on hold at 4%.
Yesterday’s shock rise in UK inflation, to 10.4%, has left many investors expecting the BoE’s Monetary Policy Committee to lift Bank Rate by a quarter of one percent today, to 4.25%.
That would be the 11th interest rate increase in a row, extending a tightening cycle which began in December 2021.
But Bank policymakers may be wary of pushing interest rate higher, as the problems in the banking sector this month have shown that the impact of last year’s interest rate increases are being felt now.
The BoE could plum for a ‘dovish hike’ – lifting borrowing costs, while signalling that rates could be near their peak. But that would be more palatable if inflation wasn’t in double-digit levels.
Ellie Henderson, economist at Investec, explains:
When deciding the appropriate level of the Bank rate the MPC will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis.
In an environment where inflation is reaccelerating, the question is whether the MPC will continue to raise interest rates or opt for a wait-and-see approach given the events that have unfolded over the past week or so.
Last night the US Federal Reserve lifted its key rate by a quarter-point, as America’s central bankers weighed up the worst banking crisis since 2008 and the highest inflation rate in a generation.
But, the Fed also indicated it was on the verge of pausing further increases in borrowing costs amid the recent turmoil in financial markets, although it does not expect to cut rates anytime soon.
Edward Park, chief investment officer at Brooks Macdonald, says setting monetary policy against a backdrop of market volatility and inflation uncertainty is “an unenviable task”.
There are two camps in the market – those who view the current risks to financial stability as an existential problem and those who consider sustained inflation as a greater evil. Fed Chair Powell had previously stated that the Fed was ‘prepared to increase the pace of rate hikes’ to tackle stickier inflation seen in the recent CPI release.
“The 25bp interest rate hike announced represents a middle ground between the hawkish and dovish camps. It acknowledges the stickiness of US inflation while being mindful of the macroeconomic risks posed by the banking sector. The equity markets initially reacted positively to the announcement, as it struck a balance between addressing investor concerns around banking contagion and indicating that the central bank is taking inflation levels seriously.
We also get interest rate decisions in Switzerland – where policymakers have been busy battling the banking crisis – and Norway.
8.30am GMT: Swiss National Bank interest rate decision
9am GMT: Norges Bank interest rate decision
9.30am GMT: Realtime UK economic and business insight data
Noon: Bank of England interest rate decision
12.30pm GMT: US weekly jobless claims
3pm GMT: Eurozone flash reading of consumer confidence