Banking · Analysis
Why your savings rate lags the policy rate
Deposit pricing is a funding decision. Banks pay what they need to pay to keep the balances they need to keep.
This is analysis. It contains the interpretation of the Wallcrest Banking Desk.
The short answer
- Loan rates reprice faster than deposit rates in a tightening cycle.
- Banks segment savers, paying more for money that is likely to leave.
- Legacy accounts drifting to low rates are the mechanism, not an accident.
A bank funds its lending mainly with deposits. The rate it offers is not a share of the policy rate passed along; it is the price required to attract and retain the volume of funding the balance sheet needs.
Deposit beta
The proportion of a policy rate change passed through to savers is known as the deposit beta. It is consistently lower and slower for instant-access accounts than for fixed-term products, because instant-access money has historically proved sticky even when better rates exist elsewhere.
Segmentation in practice
- Headline rates on new products attract inflows and are marketed heavily.
- Closed legacy accounts quietly pay less, and rarely move.
- Fixed-term bonds pay more because the bank gains funding certainty.
- Current accounts often pay nothing, subsidising free banking services.
Regulatory pressure
Supervisors in several markets now require firms to demonstrate that savings rates offer fair value and to contact customers stuck in poorly-paying legacy products. That has narrowed, without closing, the gap between headline and legacy pricing.
Sources
- Cash savings market — Financial Conduct Authority
- Interest rate statistics — Federal Reserve
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