Why savings rates should be double what they are

Think you’re getting a decent rate on your savings? Think again

British savers should be earning up to twice the interest they currently are on their savings, Mouthy Money can reveal.

In a fresh blow to savers, damning new evidence uncovers how banks are routinely underpaying customers, despite interest rates recently hitting a 15-year high.

Data compiled for Mouthy Money by Moneyfactscompare.co.uk show how banks are paying up to half the interest they were in November 2008 – the last time Bank of England Base Rate was at its current level of 4.5%.

The revelation will heap further pressure on banks, which have been accused of profiting from the recent spate of interest rate hikes at their customers’ expense.

‘Vote with your feet’

Experts have urged savers to “vote with their feet” and ditch low-paying providers for those offering higher rates of interest.

Laura Suter, head of personal finance at investment firm AJ Bell, says: “As more people vote with their feet and shift their savings to a better-paying account, banks will face more pressure to raise rates to keep customers.”

The BoE has hiked interest rates 12 times in 16 months, leading to hopes of a better deal for savers after more than a decade of measly rates.

However, savings rates haven’t risen by anywhere near as much as official interest rates over the same period. This has led to accusations that banks are taking advantage of the fact their customers rarely switch accounts.

Moneyfactscompare.co.uk’s data shows how banks are paying much lower rates of interest to savers than they were 15 years ago. This is despite the fact official interest rates are at the same level now as they were back then.

For example, the last time official interest rates were 4.5% the average easy-access account paid 3.73%. Today it pays just 2.19% – some 1.54 percentage points less.

It means someone with £10,000 in an easy-access account is earning £154 a year less, on average.

Raw deal

The problem is not isolated to easy-access accounts, with savers earning significantly less across all product types.

Savers willing to lock their money away for 12 months currently earn an average of 4.18% a year – 1.61 percentage points less than in 2008.

Similarly, savers holding their cash in three and five-year fixed rates are on average paid 1 and 0.55 percentage points less, respectively.

Those worst off are holders of easy-access ISA accounts. According to Moneyfactscompare.co.uk, these savers earned 2.42 percentage points more on their money 15 years ago than they do today.

While banks are not obliged to pass on interest rates rises in full to savers, experts widely agree they are leaving their customers short.

MPs on the powerful Treasury Select Committee (TSC) recently called on banks to explain why they have been dragging their heels when it comes to passing on rate rises to their savings customers.

Calls for action

The calls for action have become deafening since it emerged that the UK’s biggest banks reported bumper profits in the financial year just gone.

A recent investigation by Mouthy Money revealed how banks made those profits by charging mortgage borrowers higher rates and underpaying their savers.

Hargreaves Lansdown, the investment company, calculated recently that savers are missing out on £23bn a year because banks are refusing to pass interest rate hikes on in full.

Experts claim banks were more readily willing to pass interest rate rises onto savers in the past than they are today.

Rachel Springall, personal finance expert at Moneyfactscompare.co.uk, says: “Base Rate is not as intrinsically linked to savings accounts as it was many years ago. Whilst there are some deals that rise in line, there are many providers that offer savings products which can see the interest rates offered rise or fall depending on their deposit targets.”

Suter says: “Banks respond to two forces: the Base Rate and competitors. They will use Base Rate as a gauge of whether to raise their savings rates, but of much more importance is what their competitors are doing.

“No bank is going to hike rates dramatically above the highest rival, as they only need to nudge it slightly over their competitor’s offering to win business.”

Pressure building

Regardless, MPs continue to apply pressure on the banks to boost the rates they pay savers.

Recently, Harriett Baldwin, chair of the TSC and the MP leading the charge against the banks, said: “Recent results announcements show that the UK’s biggest banks are continuing to squeeze record profits from their loyal savers.

“In a high interest rate environment, and with further Bank of England base rate rises possible, banks must do more to encourage saving.”

She added: “Consumers should continue to vote with their feet and find better offerings. This, more than anything, will drive the banks to increase their currently measly rates.”

A spokeswoman for UK Finance, the trade body representing banks in the UK, says: “Banks take a number of factors into account when determining the interest rate paid to savers or by borrowers. The Bank of England’s official ‘Bank Rate’ is only one factor. Other factors include the cost of raising funds, both in the retail and wholesale markets, capital and liquidity requirements, customer and regulatory expectations and the fact not all borrowers will fully repay loans.

“There is a wide range of cash savings accounts on the market and the interest rates offered are set by individual banks in competition with each other. The level of competition in the market is a key factor, alongside the nature of a bank’s own business model and customer strategy.”

How savings rates compare now versus November 2008

Product type	Avg rate in November 2008	Avg rate on 30 May 2023	Difference (percentage points)
No notice (easy-access)	3.73%	2.19%	-1.54
Notice	3.9%	3.14%	-0.76
1-year fixed	5.79%	4.18%	-1.61
3-year fixed	5.22%	4.22%	-1
5-year fixed	4.72%	4.17%	-0.55
No notice (easy access) ISA	4.76%	2.34%	-2.42
Notice ISA	4.92%	3.03%	-1.89
1-year fixed ISA	5.86%	3.95%	-1.91
3-year fixed ISA	5.38%	4.08%	-1.3
5-year fixed ISA	5.29%	3.85%	-1.44

Source: Moneyfactscompare.co.uk; Rates based on £10k savings pot and are correct as of 30/05/23

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