Savers with memories of the aftermath of the financial crisis might have felt a sense of déjà vu after the Bank of England’s emergency press conference on 11 March.
But while an emergency base rate cut of half a percentage point, followed by another one eight days later which took the bank rate to its lowest ever level of 0.1 per cent, made most of the headlines, another recession-fighting measure might end up being worse news for savers.
As well as the base rate cut, the Bank of England announced a funding scheme for SMEs which could provide as much as £100billion in four-year funding ‘at interest rates at, or very close to, bank rate’ for banks to lend.
Bank of England governor Mark Carney (left), and his replacement Andrew Bailey, at a press conference after the announcement of a raft of recession-fighting measures, including a base rate cut to 0.25% and cheap cash for banks
This scheme will ensure base rate cuts filter through ‘to the real economy’ and provide banks ‘with a cost-effective source of funding’.
Because of that, it is ‘potentially very bad news for savers’, according to industry expert James Blower.
‘It will mean that banks can access cheap cash again’, he said. ‘We don’t know how much in total will be offered in the scheme to banks and building societies yet, but it will dampen any chances of them offering savers any improvement on rates from where we are at.’
Cheap cash again?
The Bank of England, under former governor Mervyn King, handed out billions in cheap cash to banks to keep them lending
This Term Funding Scheme, launched originally in the aftermath of the Brexit vote in 2016, is a successor to a scheme called Funding for Lending.
Funding for Lending launched in summer 2012 following the financial crisis, it ran until January 2018 and was designed to encourage banks and building societies to expand their lending by providing funds at cheaper rates.
By its launch, the bank rate had been slashed from 5 per cent in April 2008 to 0.5 per cent.
Before this, banks had been required to fight for savers’ cash with top rate deposits.
At the time ‘there was a rate war and savings rates were crazy high’, said Kevin Mountford of Raisin UK, who was head of banking at MoneySupermarket at the time.
Even Santander, then a relatively new entrant trying to muscle in on the UK banking scene, was offering an easy-access account paying 3.2 per cent in July 2012, according to Savings Champion.
But once the cash injection from the Bank of England was announced, ‘banks didn’t need retail deposits, which were expensive, anymore’, Mountford said. ‘Customer rates did reduce as there was not as much demand.’
That Santander account vanished on 8 August, and both new and existing rates fell off a cliff.
According to Savings Champion, in the first eight months of 2012 there were just 21 cuts to existing variable rate accounts. Between September 2012 and December 2013, there were 1,547.
The Bank of England’s Funding for Lending scheme helped drive down easy-access savings rates from over 3% to 1.5% in a little over a year, as banks no longer needed savers’ money
And the best easy-access rate fell from over 3 per cent in July 2012 to around 1.5 per cent by the end of 2013.
‘From past experience, we know just how damaging an emergency lending scheme can be to savings rates’, Savings Champion co-founder Anna Bowes said.
As well as an initial fall in savings rates, all that cheap money lying around in banks also helped decouple savings rates from the Bank of England base rate, meaning two successive rate rises to 0.75 per cent – after it was cut to a then-record low of 0.25 per cent after the Brexit vote in 2016 – are barely reflected in easy-access rates.
While it is hard to find figures for how much Funding for Lending pumped into banks over its six-year run, the TFS which ran for two years following the Brexit vote paid out £127billion at its peak in February 2018.
That funding will continue to slosh around the banking system until 2022, while cash from this latest TFS could last until 2024.
What could happen now?
While cuts to savings rates will come, even if rates have held up fairly well so far, it is unlikely they will suffer the same dramatic falls seen after Funding for Lending was introduced.
Not least because they can’t fall much further, with the Bank of England unlikely to cut rates lower than 0.1 per cent.
Instead, it is likelier to act more as a check on them rebounding rather than causing them to collapse.
As well as the new funding scheme, £190billion has also been freed up which banks no longer need to hold. This is 11 per cent of the £1.7trillion savings market that banks no longer need from savers.
While James Blower doesn’t believe previous funding schemes are solely to blame for low savings rates, he said the new TFS ‘isn’t going to give banks any incentive to increase rates on deposits’.
But Kevin Mountford says the new scheme isn’t ‘doom and gloom for everybody’, as not all banks will have necessarily have access to the funding scheme.
While details are still hazy, he felt the biggest banks could be the biggest beneficiaries, with some challenger and overseas banks still providing relatively attractive rates for most people.
He said more customers may even move away from the big banks, although that might be unlikely.
In February last year, in a piece speculating on life after cheap funding schemes, accountancy giant Deloitte wrote: ‘Whilst interest rates currently remain near historic lows, rates paid to depositors could rise sharply in the short to medium term as the TFS scheme begins to unwind.’
Unfortunately, with a new funding scheme ready to wind up, that may prove premature for rate-starved savers.
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