Savers hoard cash despite record low rates
The Bank of England’s Money and Credit report revealed that the strong flow of deposits in September was largely due to cash being paid into easy access accounts.
However, the interest rate paid on deposits fell further in September with instant access accounts paying an average 0.13% – the lowest level since the Bank started collating the data in 2016, while longer term accounts have hit 0.56%.
But, mortgage borrowing grew from £3bn in August to £4.8bn in September. Mortgage approvals for house purchases also increased to 91,500 – the highest since September 2007. The Bank added that effective mortgage interest rates were broadly unchanged.
Meanwhile, consumer credit borrowing weakened in the month, with households making net repayments of £600m. It comes as the interest rate on interest-charging overdrafts increased by an additional 3.5 percentage points, to a new high of 22.52%.
Laith Khalaf, financial analyst at AJ Bell, said: “Savers are hoarding cash even though rates are at record low levels. Money that might in normal times have been spent in pubs and restaurants is being ploughed into the bank for a rainy day.
“However, we’re getting to the point when a bank account is about as useful as a mattress when it comes to paying interest. Even though inflation is also low, much of the money squirrelled away into cash savings is slowly losing its buying power.
“Cash is pretty much the only option savers have if they might need that money again at the drop of a hat, and given weak economic conditions it’s a good idea to have a cash buffer to deal with any unexpected expenses, or just in case you lose your job. You can still shop around for the best rates and consider tying some of your money up for a bit longer in fixed term saving products to get a little more return for a little less flexibility.”
Khalaf added that while mortgage approvals hit a new high, many buyers will wonder whether they can complete a house purchase before the end of the stamp duty holiday in March. And while consumer finances look healthy, millions are facing financial difficulties as government help is trimmed back and lockdowns take their toll on businesses.
“That situation is unfortunately only going to get worse,” he said.