Carney Cripples Savers for Years With Rates Pledge: U.K.

Photographer: Chris Ratcliffe/Bloomberg

Elderly pedestrians pass a logo on display outside a Barclays Plc bank branch in Hatfield, U.K. Close

Elderly pedestrians pass a logo on display outside a Barclays Plc bank branch in Hatfield, U.K.

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Photographer: Chris Ratcliffe/Bloomberg

Elderly pedestrians pass a logo on display outside a Barclays Plc bank branch in Hatfield, U.K.

Bank of England Governor Mark Carney’s plan to revive Britain’s economy with three years of record-low interest rates and cheap funding for banks is coming at the expense of the nation’s savers.

Rates on savings accounts at Barclays Plc (BARC) and Royal Bank of Scotland Group Plc have sunk below most measures of inflation as the Funding for Lending Scheme makes banks less interested in attracting customers’ deposits.

According to Moneysupermarket.com, which shows consumers price comparisons on financial products, the highest yield on offer is a tax-free individual savings account, or ISA, at government-owned National Savings & Investments that pays 2.25 percent. That trails the U.K. consumer-price index, which rose by 2.8 percent in July from a year earlier.

“It’s an extraordinary wealth transfer that the Bank of England seems to be happy with, and it’s going to continue for three years,” said Simon Rose, a spokesman for Save our Savers, a lobby group that campaigns to preserve the value of pensions and is critical of low interest rates. “Savers are being asked to pay the price. They are being penalized at the expense of people borrowing money.”

Another measure of inflation, the retail price index, is even higher at 3.1 percent. Unlike CPI, the RPI includes items such as local taxes and mortgage costs. Low savings returns are intensifying the most prolonged squeeze on living standards in more than 50 years, according to the London-based Institute for Fiscal Studies, an independent research organization.

Bank Funding

For savers wanting instant access to their money instead of locking it away in an ISA, which.co.uk shows the best rate is 1.55 percent at Sainsbury Bank (SBRY), the personal-finance unit of the U.K.’s third-largest supermarket chain.

The nation’s largest banks, including Barclays, RBS and Lloyds Banking Group Plc (LLOY), don’t feature in the top providers of regular savings accounts ranked by either which.co.uk or moneysupermarket.com. Lloyds, Britain’s biggest mortgage lender, revived the two-century-old TSB brand today for 631 branches it’s being forced to sell by U.K. regulators.

Carney, who became governor on July 1, introduced forward guidance in August saying the BOE plans to hold its benchmark rate at 0.5 percent until unemployment falls to 7 percent from its current 7.8 percent. The bank doesn’t see that happening for another three years.

Deposit Demand

While the BOE’s key rate has stayed at a record low since March 2009, rates for deposits have tumbled from their levels in the immediate aftermath of the financial crisis, when banks saw retail customers as a key source of capital to bolster their finances and shore up confidence.

Barclays ISAs yielded 3.61 percent in 2009, more than double the 1.29 percent offered today, moneysupermarket.com (MONY) says. The NatWest Cash ISA, offered by RBS, earned savers 3.51 percent in 2009, compared with 1 percent today.

In the U.S. the best nationally available savings rate is offered by The Palladian PrivateBank, which pays 1 percent, according to Bankrate.com., a comparison website. Barclays U.S., GE Capital Bank and Sallie Mae Bank each offer 0.9 percent.

Both RBS and Barclays use Funding for Lending, created to prod banks into lending more to consumers and small businesses. As of June 30, participating lenders had drawn about 17.6 billion pounds ($27.6 billion) from the program, which runs until January 2015, BOE data show.

‘Market Conditions’

“We have seen a major shift in the U.K. from a need and desire of banks to raise deposits through retail consumers, which clearly was the case during the peak of the economic downturn,” Kevin Mountford, moneysupermarket.com’s head of banking, said by phone. “Cheap funding is helping to bolster balance sheets. We are seeing a huge dip from banks in terms of appetite for savings.”

Some 93 billion pounds of fixed-rate products in the U.K. retail market mature this year, according to estimates provided to HSBC Holdings Plc (HSBA) by data provider CACI. Investors face a 1 billion-pound drop in income if they reinvest those savings into similar products given the lower rates, the London-based bank said in July.

RBS (RBS)’s savings rates “reflect current market conditions and we regularly review them,” the Edinburgh-based bank said in an e-mailed statement. “We aim to keep our rates as consistent as possible over time and we don’t offer introductory bonus rates that drop-off after a short period.” A Barclays spokeswoman declined to comment.

Incomes Squeeze

While economic growth more than doubled in the second quarter to 0.7 percent, consumer prices are rising at almost triple the pace of basic wages. Median incomes adjusted for inflation probably fell for a third straight year in the 12 months through March and will continue to drop, leaving households no better off than they were in 2000-2001, the IFS estimates.

There is evidence that Britons are being driven to the stock market for returns. Investor sentiment on U.K. stocks is at its highest in six months, and equities are now the second-most-popular asset class after property, a survey published by Lloyds TSB Private Banking last month shows. The U.K. benchmark FTSE 100 Index (UKX) has climbed more than 10 percent this year.

Recent property market indicators have shown prices are rising, and a report last week by Halifax, Lloyds’s mortgage arm, showed values increased for a seventh month in August and will probably continue to increase through the rest of the year.

“The dire situation we see for savers at the moment will continue for the next couple of years,” Mountford said. “The danger and unintended consequence is that people start to take more risks.”

To contact the reporter on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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