1st July 2022

Bank of England Miserable May: £1tr in rock bottom easy access accounts, and borrowing warning signs

The Bank of England reported on effective interest rates for May and also its money and credit report for May.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, comments:

“The scale of cash languishing in easy access savings and earning next to nothing has hit monumental proportions. Our commitment to saving, both during the lockdown years and even now, means we now have nearly an incredible £1tr of savings (£994bn) in easy access accounts. As a result, we’re losing a small fortune in lost interest.

In May we saved another £5.4bn, plus another £300m with NS&I. This is just above the average combined total of £5.6bn in the year before the pandemic. It also takes the total in easy access accounts close to £1tr. So, it’s particularly dreadful news that the average easy access rate crept up just 3 basis points to 0.18%. Of course, if your money is sitting with one of the high street giants, then your cash may be suffering even more insulting rates, with one bank still paying just 0.01%.

You can see just how low rates are in the market by looking at the rates available from NS&I–which by definition has to offer something reasonable without going over the top. The last time the Bank of England was at the same rate as it was in May 1% in February 2009), NS&I was offering 1.71%. Right now, the same product is offering 0.5%-less than a third of the interest. The blame lies partly with the high street banks, who are still sitting on a pile of lockdown savings in easy access accounts, so they don’t need to offer anything particularly competitive, which is depressing rates across the sector.
Fortunately, easy access rates have risen among newer online banks, which are competing for market share.For money you need over the next five years, but not immediately, you can tie it up for the period that makes the most sense for your circumstances in return for more interest. The Bank of England figures show that the average new fixed rate rose 16 basis points from 1.09% to 1.25%, and you can get increasingly attractive rates by fixing. The best rates over one year continue to creep up. Right now, by fixing for a year, you can make up to 2.7%-compared to a best rate of 2.4% a month ago. If you don’t want to fix for a full year, you can make 2% by fixing for six months through a savings platform.

It was a miserable May for borrowing. The figures reveal a double debt warning, with more of us borrowing more on things like credit cards and mortgages in an effort to stay on top of rising prices, while mortgage approvals hold steady, despite it starting to be predicted that the heat is coming out of the market.

Mortgage approvals are a useful measure of the health of the property market, because they show just how keen buyers are right now. The fact that approvals are still below the pre-pandemic average in May is perhaps another sign of the heat coming out of the market.

It comes on the day that Zoopla said housing prices went nowhere in May, up 0.1%, which is the slowest monthly rise since December 2019–before the pandemic hit the UK. It’s now showing annual rises of 8.4%, so as far as Zoopla is concerned, the days of double-digit growth are over. It also noted that while demand from buyers was still high, it is dropping on a daily basis, which means it’s taking longer to agree a sale–in London this has stretched to 35 days.

We’ve heard the first notes of caution about the future of house prices too, and the first predictions of property price falls. And while these are currently a few lone voices, price growth is highly likely to drop back to at least low single figures by the end of the year.

Meanwhile, we borrowed another £400m on credit cards. The horrific price rises in April will have left millions of people with a financial headache in May, and while some people have lockdown savings to fall back on, plenty are being forced to borrow instead. Even before Awful April and Miserable May left us struggling to make ends meet, we were falling back on our credit cards more. The only glimmer of hope is that credit card borrowing is slightly below the 12-month pre-pandemic average.

If you’ve used credit to help close the gap, it’s essential to bear in mind that this isn’t a long-term solution. Unless you can simultaneously start cutting your costs, you’re going to end up with even bigger problems–because you’ll have to pay mounting debt costs on top of everything else. It means we all need to go back to our budgets and check we’re doing everything we can to keep our spending down. If Miserable May can turn to Just-about-managing-June, it’s not going to feel like much to celebrate, but it’ll put out finances in a far better place as we face July.”

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