UK households withdrew a record amount from bank accounts last month, suggesting consumers are looking elsewhere for higher interest rates or tapping their savings to pay bills.
A net £4.6bn was taken out from banks and building societies in May, the highest level of withdrawals since monthly records began in 1997, according to the Bank of England data published on Thursday.
Large net withdrawals from instant-access accounts were only partially offset by net inflows into fixed-term accounts, which typically pay higher rates, and individual savings accounts, which offer tax-free dividends and interest on shares or cash.
Households are contending with high inflation, which stood at 8.7 per cent in May, with some complaining that bank savings rates are failing to catch up with the BoE’s rate hikes.
BoE figures showed the effective rate on instant-access accounts dropped 8 basis points to 1.33 per cent in May. That lags considerably both the central bank’s benchmark rate, now at a 15-year high of 5 per cent, and rates for two-year fixed mortgage deals, which are above 6 per cent.
In its latest report, the BoE’s Monetary Policy Committee noted that “the pass-through [of higher interest rates]” to these accounts had “been unusually weak” since it began raising rates in December 2021.
Ashley Webb, UK economist at consultancy Capital Economics, attributed some of the fall to “people moving money into other investments outside of the banking sector, such as UK gilts”. But he added: “It’s possible that households’ pandemic savings are being depleted to support spending.”
Yields on UK 10-year gilts stand at about 4.3 per cent, up from 3.3 per cent in March, while two-year government bonds have a yield of 5.2 per cent, up from 3.2 per cent in March, reflecting the changing outlook for interest rates.
Daniel Mahoney, UK economist at Handelsbanken, said the record £4.6bn figure provided “strong evidence” that people were “dipping into excess savings built up during the pandemic to sustain living standards” amid the cost of living squeeze.
Charlotte Nixon, mortgage and financial planning expert at Quilter, said bank executives had been under pressure to raise interest rates for savers as they have done for borrowers. But she said they had argued that “mortgage rates would need to get pushed even higher for them to still achieve their margins”.
The BoE figures also showed that net mortgage approvals for house purchases rose to 50,000 in May from 48,690 in the previous month.
The number was higher than the 49,700 forecast by economists polled by Reuters but well below the average of 66,000 between 2015 and 2019, as higher mortgage payments hit prospective buyers.
The figures, however, do not fully capture the sharp rise in mortgage rates since the end of May, after official data showing stronger than expected wage growth and inflation pushed up interest rate expectations.
Thomas Pugh, economist at the consulting firm RSM UK, said the rise in approvals in May was “likely to be reversed” this month “as the recent surge in mortgage interest rates depresses demand”. He forecast a peak-to-trough decline in house prices of about 10 per cent, “with the risk of bigger falls if interest rates continue to rise”.