UK banks still cutting savings rates, widening margins
Simon Ward
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UK quoted mortgage rates were little changed in April but rates offered on new fixed-rate bonds continued to plunge, according to Bank of England data released today. Banks, in other words, continue to widen margins.
Two-year fixed-rate bonds now offer only 1.90%, down from 3.24% in June 2012, just before the introduction of the funding for lending scheme. The decline of 1.34 percentage points (pp) compares with reductions of 1.00 and 0.87 pp in rates on two-year fixed-rate mortgages at 90% and 75% loan-to-value (LTV) respectively – see first chart.
Margins have also widened on floating-rate products. The average standard variable rate has actually risen by 0.12 pp since June 2012, even though banks are paying 0.57 pp less on instant-access deposits offering a bonus.
Wider bank margins are desirable to strengthen balance sheets and support future lending but the punishment being meted out to savers – with official approval – is brutal.
The second chart shows that a yawning gap has opened up between the dividend yield on the FTSE all-share index and the rate on two-year fixed-rate bonds. Retail buying of equity funds, unsurprisingly, has picked up, though currently remains modest: IMA figures show a net inflow of £3.8 billion in the six months to March, up from £800 million in the prior half-year.
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