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What the Bank of England’s latest borrowing figures mean for savers

We take a closer look at the Bank of England’s latest borrowing figures, what they mean for savers, and how savers could find better rates.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

It’s been a turbulent time for savers and borrowers.

After almost two years of low interest on savings and loans, the end of last year saw rates start to tick up again. But instead of inspiring us to pay back debts with renewed enthusiasm, and boost our savings to new highs, it seems to have done precisely the opposite.

What’s changed?

New Bank of England figures for November 2021 found that consumer borrowing (excluding mortgages) was up 0.4% in a year – the first positive annual growth since the start of the pandemic. In November alone, we borrowed another £1.2 billion in consumer credit (excluding mortgages), including 0.9% on credit cards.

Unfortunately though, much of this borrowing is costing us more. The cost of new loans rose to 6.43%, up from 6.27% a month earlier, and a low of 4.41% at the end of June. Interest rates eventually rose from 0.01% to 0.25% in December, but speculation began weeks earlier, and this was enough to push borrowing rates up in November.

Market expectations feed into rates, because the financial system starts to work on the basis that rates will be higher in future. The key is swap rates – which is essentially the swapping of a variable rate for a fixed one. The higher they expect the variable rate to rise in future, the higher the fixed rate they demand to compensate for it. This then pushes up the cost of borrowing for banks – which they pass on to their customers.

Savings rates rise

Although we saved £4.7 billion in November, this is well below the monthly average in the previous 12 months of £11.2 billion. It’s also below pre-pandemic savings levels, which averaged £5.5 billion in the 12 months to February 2020. This is despite savings rates creeping up again.

Savings started to reflect expectations of a rate rise, with the average rate on fixed-term savings rising again from 0.36% to 0.37% – up from a low of 0.29% at the end of August.

Soaring borrowing, sliding savings and rising rates have all been driven by the same thing – inflation.

This rose to 5.4% – its highest level in nearly 30 years – in December. It’s putting our budgets under real pressure. Many of the price hikes we face are for the kinds of things we can’t live without – like energy, petrol, and items needed for essential maintenance. So, we’re borrowing more and saving less to close the gap.

Meanwhile, inflation has been pushing up saving and borrowing rates, and eventually inspired the Bank of England to raise rates in December.

What can you do?

With inflation on the rise, the best protection is to draw up a household budget, using an online budget tool.

Take a look at recent bank statements, or your banking app, and make a list of everything you spend. This includes all your regular expenses, big annual costs like holidays and Christmas, and ad-hoc expenses like new clothes and property repairs.

Next, put in your monthly earnings, and keep tweaking the spending figures until you’re spending less than you’re earning. This might mean you need to cut back on some spending, and the best place to start is by shopping around, so you get the same things for less.

Once you’ve done that, you can cut out the expenses you’re not getting enough value from. A direct debit cull is a good way to do this, and a good long look at things like gym membership and magazine subscriptions. In some cases, this alone won’t be enough, and you’ll need to make some harder decisions about lifestyle tweaks.

This should help keep you out of the red, and free up a sum of cash to help pay down expensive debts, or put aside into savings.

Once you’ve built your savings, you need to make sure they’re working as hard as possible. This means assessing how much of your cash you need in an easy access account. If you’re working, three to six months’ worth of essential expenses is a good starting point. If you’re retired, something closer to one to three years’ worth is a good guide.

Once you have this money in a competitive easy access account, you can then start looking at making the most of the rest of your cash savings. And you don’t have to make an enormous commitment to get a better deal. You could even get better rates by fixing for just a year if you’re happy to keep this money tied up until the term ends.

Right now, with rates on the rise, you might be nervous about locking up all of your savings for the long term. But fixing some of your savings, if it fits with your circumstances, could give you a better return.

Don’t just settle for your high street bank for any of these savings. We found that when people are looking for a home for their savings, 40% settle for an account with whoever they hold their current account with*. But you can do much better than this.

*Opinium survey for HL, September 2021, 1,396 participants.

Where to find competitive rates? 

One way to get access to competitive rates and mix and match across different banks and building societies is with Active Savings.

Without endless paperwork, and everything in one online account, you can set up your Active Savings account and choose your savings products straight away if you’re an existing HL client.

The article has information to help you make the most of your money. But it isn’t personal advice.

Find out more about Active Savings

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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