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|Rock-bottom interest rates stunting growth in UK savings accounts|
|Thursday, 05 November 2015|
According to a new Timetric report, interest rates on all savings accounts are at record-lows in the UK and are failing to entice customers despite improving economic conditions. Growth has been slow across all savings accounts, apart from Individual Savings Accounts (ISAs), which have been growing mainly due to the upper limits being raised every year since 2010, as opposed to attractive interest rates.
Household cash deposits, for example, rose from GBP1.30 billion in January 2015 to GBP1.32 billion in August 2015, after recording an average monthly growth rate of only 0.41%. Despite improved growth over the same period in 2014, the rate is sluggish given the improvements in real wages in 2015, as consumers have opted to spend money or pay existing debts.
According to Ben Carey-Evans, Analyst at Timetric: “The central bank rate remaining so low has meant that banks have had access to extremely cheap funds and therefore have not needed to compete for savings accounts from consumers. This in turn has made borrowing from banks cheaper, meaning taking on debt for high-value purchases or moving house has been cheaper throughout the review period, so investing and paying off debt has been more appealing than stashing cash away in savings accounts.”
The total amount of money subscribed to all ISAs has been rising gradually since 2007, and Timetric expects this trend to continue until 2019. Growth of around 5.1% is predicted for FY2015–2016 as savers begin to utilise the increased upper limits for cash ISAs, before growth steadies to approximately 3.9% by the end of 2019.
Timetric forecasts just 3.1% growth in 2016, leading to GBP81.3 billion subscribed to ISAs at the end of the year. The growth rate will remain around the same level for the rest of the forecast period, increasing by 4.7% to reach GBP90.9 billion in 2019.
On the other hand, household retail saving balances are expected to rise at a CAGR of 2.30% over the next five years, to reach GBP1.31 trillion in 2019. Growth will be buoyed initially by rising real wages and low inflation; however, current levels of inflation and low interest rates are not expected to last into 2016, meaning the cost of living will increase, reducing many households’ capacity to save. Increasing interest rates over the latter part of the forecast period, however, will attract those consumers who can afford to save more, meaning that deposits will continue to grow.
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