Saving account interest based on BOE base rate?

Question

Do banks have to increase there interest rate for savings accounts if the bank of england base rate increases? Is it a legal requirement or is it just how the bank feels at the time? Or do some banks increase their rate and to keep competition going the others have to increase their rate as well? How does the BOE base rate relate to the interest rate you get on a savings account?

Answer 1

The Bank of England (BOE) regulates the "commercial lending rate", which is the overnight rate for lending to other banks. Banks are required to keep a certain percentage of their deposits on hand and then lend the rest out. They don't want to keep any excess money on hand as it is foregone income. They don't want to have too little, because it is against the law.

Banks want to lend out their money at higher rates, rather than lower. Ideally, they lend to consumers and businesses at a high rate (the trade-off being risk for returns). The rest, they lend to other banks that need the liquidity to top them up to their reserves (low risk, low returns). If nobody wants it, you lend to BOE overnight for the lowest rate (no risk, lowest returns). This is analagous to the US' Federal Reserve overnight deposit rates.

So the BOE directly affects the very shortest interest rates (overnight), but they do not directly affect what happens "out the curve" - that is on loan/deposit terms longer than one day. Banks make up their own terms of interest rates, but are tightly limited by currency/interest rate arbitrage and competition from other banks. That is, the currency, futures and interest rate markets are all intertwined - making it almost impossible for banks to have widely different interest rates (in the same market) due to interest rate/currency arbitrage.

Short-term deposits (checking, savings, money markets) are less market-efficient than long-termed deposits due to some oligopoly power in banking and high service costs to serving deposits. That's really a long-winded answer for "you are a peon with little money, so they gouge you on rates as much as you can because you don't have an alternative". As your deposit balance goes up, you'll find your bank becomes REALLY friendly with you. As a result, your savings account generally goes in the same direction as the BOE rate - but not necessarily lockstep.

That's why it's nice to occassionally get an institution that offers deposits thare ARE linked to official rates. You don't feel like you're getting screwed.

That's a really long, confusing answer. Sorry.

Answer 2

the government buys and sells government bonds to attempt to rigidity the LIBOR value up or down observing the hot value. while it somewhat is at last carried out, government bond yields have additionally moved in that direction. on account that government bonds compete with saving debts and different time deposits, those debts flow interior the comparable direction.

Answer 3

Bank it under your bad!

Answer 4

yes, but if you keep money in your sock then this doesn't matter so much.