Yesterday, the Bank of England increased its benchmark rate by 25 basis points (bps) to 5.25%. The decision was anticipated by markets and follows the recent decision of the US Federal Reserve to increase rates as well.
The Banks’ Monetary Policy Committee (MPC) voted 6 to 3 to increase rates by 25 bps, while two members preferred a more hawkish approach of raising by 50 bps, and one member wanted to hold rates at 5%.
While inflation diminished slightly from 8.7% in May to 7.9% in June, other indicators, such as employment, remained tight. Quarterly GPD has held around 0.2%. Inflation is expected to continue its retreat dropping to 5% later this year. The MPC’s target rate is 2% inflation so there is a ways to go.
CI received a comment from James Blower, Head of Savings at Zopa Bank – which intends to pass on the 25 bps increase to its savers.
Blower said that the larger-than-expected drop in inflation was a positive surprise but the Bank continues to be prudent in its approach.
“Inflation remains high, in fact, much higher than in other major European economies like Germany or The Netherlands,” said Blower. “With the BoE eyeing its 2% inflation target we will see further Base Rate increases until inflation gets under control. While a Base Rate jump adds even greater pressure on people’s mortgages and household budgets, for savers it means higher returns can be available.”
Blower noted that the UK Financial Conduct Authority intends on “naming and shaming” banks that do not pass on the rate increases to savers. This means consumers may want to reconsider their savings options. Blower said that digital banks are more likely to offer higher returns sharing that the lowest high-street bank now offers a paltry 1.1% rate while the top digital bank offers 4.63%.
“Customers shouldn’t settle for low returns and should shop around for banks that reward them. The best savings accounts offer a high-interest rate, good service, accessibility, and tools for consumers to manage their money instantly with a few taps from their smartphones,” said Blower.