Interest rate rises unlikely to bring relief for long-suffering savers

6 August 2015

moneyAs we all know, interest rates have been lower than a limbo bar for ages now, but with increasingly-present signs of economic recovery, most of the types who know this sort of thing are predicting that rates will rise from next year onwards. While this could spell bad news for borrowers, who are currently enjoying rock-bottom loan rates, savers and those on a fixed income might be looking forward to an increased return. However, forecasts from analysts at credit ratings agency Moody’s suggest that savers may have to wait longer to see an upturn in their personal fortunes.

While the Bank of England is probably going to start slowly increasing the rate, which has been at the lowest-ever 0.5% since 2009, Moody’s claim that savers will not benefit when interest rates rise. They suggest that instead the banks will seek to hold down deposit rates to improve their profit margins. As if our local friendly banks would do such a scurrilous thing.

“These increases should contribute positively to the banks' profitability since we do not expect them to pass the benefit immediately to savers,” said Moody's Carlos Suarez Duarte. “We think it’s unlikely that UK banks will pass all the benefits of higher interest rates to their customers and therefore, margins should initially improve,” he finished.

However, they also suggest that the crunch of higher borrowing rates might be tempered by attractive offers as banks fight for market share as well as profitability- challenger banks such as TSB and Virgin have taken a larger chunk of the market from the big boys than they would like to admit.

The ratings agency also predicted there would not be widespread financial hardship among UK households on the back of a rate rise. Partly this is down to the expected slow and steady increase, which allows households to adjust to increased payments over time, but also because the industry has, purportedly, learned something from the financial crisis, and tighter affordability checks mean that a 1% rise should be able to be absorbed into a household budget.

"Low interest rates and bank competition have made consumer debt more affordable, hiding the risk to highly indebted consumers. However, we expect only moderate and gradual interest rate hikes during the outlook period, which would allow borrowers to adjust their personal budgets and therefore, prevent a material deterioration in asset quality," said the Moody's, adding that they anticipate that “an increase of 1% on the base rate will have no effect in the level of arrears of the prime mortgage portfolios.”

"Even a three percentage point increase in the base rate would imply only 4% more borrowers facing payment problems according to our forecast," he finished

TOPICS:   Economy   Banking

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