UK households withdrew a record amount from banks and building societies last month, suggesting more consumers are looking for higher interests elsewhere and tapping their savings to maintain living standards amid high inflation.
Data published by the Bank of England on Thursday showed households took out a net £4.6bn from banks and building societies in May, the highest level of withdrawals since monthly records began in 1997.
The record number was driven by a jump to £11.4bn net withdrawals from accounts offering interest, which can be accessed without penalty and typically have a variable rate. Meanwhile, net withdrawals from accounts offering no interest were £3.3bn, marking the seventh consecutive month of customers pulling out more than they deposited.
The data comes as households contend with the stubbornly high rate of price rises, which stood at 8.7 per cent in May, and banks fall under greater pressure to pass on rising interest rates to savers.
BoE figures showed the effective rate on instant-access accounts dropped 8 basis points to 1.33 per cent in May. That lags considerably both the central bank’s benchmark rate, now at a 15-year high of 5 per cent, and rates for two-year fixed mortgage deals, which are above 6 per cent.
In its latest report, the BoE’s Monetary Policy Committee noted that “the pass-through [of higher interest rates]” to these accounts had “been unusually weak” since it began raising bank rate in December 2021.
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Ashley Webb, UK economist at consultancy Capital Economics, attributed some of the fall to “people moving money into other investments outside of the banking sector, such as UK gilts”. But he added: “It’s possible that households’ pandemic savings are being depleted to support spending.”
Yields on UK 10-year gilts stand at about 4.3 per cent, up from 3.3 per cent in March, while two-year government bonds have a yield of 5.2 per cent, up from 3.2 per cent in March, reflecting the changing outlook for interest rates.
Daniel Mahoney, UK economist at Handelsbanken, said the record £4.6bn figure provided “strong evidence” that people were “dipping into excess savings built up during the pandemic to sustain living standards” amid the cost of living squeeze.
The data for May showed withdrawals from instant-access accounts were only partially offset by net flow into fixed-term accounts, which require advance notice for withdrawals, and individual savings accounts. The latter — known as Isas — allow people to hold a limited amount cash, shares and unit trusts free of tax on dividends, interest and capital gains.
Charlotte Nixon, mortgage and financial planning expert at Quilter, said bank executives had been under pressure to raise interest rates for savers as they have done for borrowers. But she said they had argued that “mortgage rates would need to get pushed even higher for them to still achieve their margins”.
The BoE figures also showed that net mortgage approvals for house purchases rose to 50,000 in May from 48,690 in the previous month.
The number was higher than the 49,700 forecast by economists polled by Reuters but well below the average of 66,000 between 2015 and 2019, as higher mortgage payments hit prospective buyers.
The figures, however, do not fully capture the sharp rise in mortgage rates since the end of May, after official data showing stronger than expected wage growth and inflation pushed up interest rate expectations.
Thomas Pugh, economist at the consulting firm RSM UK, said the rise in approvals in May was “likely to be reversed” this month “as the recent surge in mortgage interest rates depresses demand”. He forecast a peak-to-trough decline in house prices of about 10 per cent, “with the risk of bigger falls if interest rates continue to rise”.
Source: Economy - ft.com
