Curinos Perspective: BoE Hikes Rates, But Will Banks Follow?

The Bank of England has increased rates for the sixth time in just nine months. While the move to 1.75% was widely anticipated, the 50-basis point increase represents the largest in almost 30 years as the central bank tries to tame inflation. Further rises are expected before year end.

What does this mean for the deposit market? Unattractive rates have fuelled consumer inertia. Indeed, data from Curinos eBenchmarkers show the six largest retail banks saw personal deposits increase by almost 5% in the last 12 months – and that’s without attractive pricing. It begs the question: at what price point does customer inertia change, especially for brands that need to attract deposits?    

Some rates are already becoming more attractive. Market rates are going up with several instant accounts now offering rates of roughly 1.4%, the like of which hasn’t been seen since Goldman Sach’s Marcus launched in 2018. 

Most deposit holders could improve the return on their savings by switching. With the Consumer Prices Index hitting 9.4% in June and the constant focus on the cost-of-living crisis, more savers will likely start looking for a better rate of return.   

This behaviour is already happening elsewhere. Curinos benchmark data from North America show churn (the proportion of instant account funds switching to a higher rate) doubled as the market passed 1.50% in the prior rising-rate environment. Additionally, a shift to bonds may increase as the share of fixed-term deposits increased at 5% per year as well. 

The latest rate rise means that base rates are at their highest since the financial crisis of 2008-2009. In that volatile period, the market was largely branch based. Now, however, it is largely digitally led. (See Figure 1.) It is very possible that the convenience of digital services will facilitate increased switching. 

Price competitiveness and the consumer need to save money has led to market changes in other financial products. Almost half of all new credit cards sales now occur through price comparison sites. Currently, few deposit sales originate this way. Will this change and will it cause the cost of acquisition to increase significantly?  

The upshot for financial providers is to remember that competitors and customers don’t all look alike. Some customers will chase higher rates and some institutions will be forced to offer them. Understanding broader market moves is equally important. With each provider reacting in different ways, it is critical to use competitive intelligence to be proactive rather than reactive. 

Future moves by the Bank of England are far from certain. The pace of rate hikes may increase if inflation remains persistently high. Scenario planning, therefore, will be crucial. This can help keep banks on the front foot, thus maximising the potential for success. 

Figure 1:

Eoin Creedon
Principal Consultant
eoin.creedon@curinos.com
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