Cascade Commentary

Rate reductions for savers as banks prepare for hike in default rates

July 2020

Savers have suffered a big hit to their returns over the Covid-19 lockdown while banks have bolstered reserves for expected hikes in impairment rates. As individuals lose their jobs and businesses continue to fight for their survival, many economists are predicting significant levels of defaults over the coming years. For Covid-19 specific loans, estimates from the Office for Budget Responsibility suggest that up to 40 per cent could end in default.

This is having a clear impact on savings as providers look to steady their balance sheets to withstand the crisis. With lending income at risk, banks and building societies are reducing rates on their deposits to minimise outflows, rendering savings rates even lower. Instant Access rates have been cut by the largest current account providers from a mean of 0.24% in January 2020 to a mean in June 2020 of only 0.06%. Many have sought to move money elsewhere to protect capital across different banking licences while also gaining marginal rate increases, with the mean rate at 0.26% on a whole of market level.

As it stands, the NS&I Income Bond is paying 1.16% AER while the Direct Saver product is paying 1.00% AER. These products are instant access and afford savers the right to withdraw without notice with online access for most to conveniently instruct the desire to do so. These rates are 100% secured by HM Treasury and are beating most on the market at the moment. While Marcus by Goldman Sachs has slowly reduced its rate from 1.50% to 1.05%, NS&I cancelled its planned rate reduction to 0.75% and savers have been enjoying the HM Treasury backed offering as a safe haven for their cash.

In the notice account market, rates have also migrated downwards with a mean whole of market rate reduction of 0.36% on 90 day notice products and 0.54% for 120 day notice products. Challenger banks and building societies mean rates have reduced with the Challenger Bank rate drops shown in Figure 2. The mean rate on offer for 90 day notice products has fallen by 0.44% for challenger banks and by 0.32% for building societies, while these drops extend further to 0.61% and 0.65% respectively for 120 day notice periods. 

Notice accounts are typically attractive due to the liquidity breaks they permit and often the rates are compelling when compared against longer-term fixed rate bond equivalents. The downside however is that banks and building societies reserve the right to adjust the rate paid relative to prevailing market conditions. Savers are experiencing many rate reductions for open and closed variable rate products and so we encourage you to keep a close eye on the rates you are earning. Typically rate reductions are preceded with ample notice being provided by the bank or building society. In such circumstances, we can let you know your next best options so do keep us abreast of any correspondence received. While the rates remain low, maximising both your depositor protection and rate being earned is essential for optimising your cash portfolio.

The Fixed Term Bond market has also taken a severe hit, particularly in the second quartile of rates. On a one year term, the top quartile has fallen on average by 0.54% whereas the second quartile has fallen by 0.60%. This is true for longer terms too, with five year rates falling on average by 0.30% in the top quartile but by 0.65% in the second quartile. This means that the biggest impact for savers is for those that in particular wish to fully diversify their holdings as the further down the league table savers are moving, the bigger the impact of Covid-19 to rates. With this in mind, diversifying across different liquidity terms seems to be the best way to access a more optimal outcome when balancing return, depositor protection and liquidity.

We expect that rates will remain volatile in the coming months as the economic legacy of Covid-19 sets in. Monetary policy has been eased further as policymakers seek to incentivise spending and investment as opposed to the stockpiling of cash. Despite this, cash levels remain high against the unemployment woes of many households and the uncertainties facing many businesses. Our role is to make sure our clients get the best returns possible from their cash at any time, in as diversified a way as is practical, which we continue to do. Should you have any queries regarding your cash holdings, do get in touch and we’ll look forward to supporting you.

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