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Profits to get uplift

Banks to benefit as savers await boost from rate rise

Money - own pic

Savers will have wait for any benefit from rate rises (pic: Terry Murden)


Banks rather than savers are likely to be the biggest beneficiaries of a rise in interest rates which is expected to be announced this week.

Rates have been rising in the US since late 2015 and the markets believe there is around a 90% chance the Bank of England follow suit this week.

Odds are shortening on a rise from 0.5% to 0.75%, marking the first time since 2009 that the bank rate would be above 0.5%, though savers may have to wait for any uplift.

The interest paid out by banks to depositors tends to rise less slowly, if at all, when rates rise. Before the financial crisis British banks only paid depositors around half of bank rate and since then banks have suffered from ultra-low rates squeezing their margins.

The Financial Conduct Authority has been considering a new basic savings rate aimed at improving returns for savers after admitting that attempts to improve competition between banks had failed to improve returns for consumers.

A minimum interest rate on instant access and easy saver accounts could cost the banks around £300m, the FCA said, and may result in their having to shave a small amount off some of the best “teaser” introductory rates on accounts.

A Treasury committee will this week call for an overhaul of tax relief on ISAs. It will say there is little evidence that tax relief encourages vulnerable households to save.

Analysts say banks will see a boost to profits from higher charges on loans as long as the economy does not weaken, causing their customers to default.

The CBI reported yesterday that growth in the UK’s private sector picked up in the three months to July, although it expects “slow but steady” growth ahead as living standards continue to be dogged by weak productivity, and uncertainty holds back business investment.

This cautionary outlook is unlikely to deter the Bank of England from raising rates this week as it looks to ‘normalise’ monetary policy. The latest BoE statement will be released alongside new forecasts for growth and inflation.

A rise in bank profits will help boost their share prices which may help accelerate the government’s plans to offload more of its holding in Royal Bank of Scotland.


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