New Term Fund Lending scheme could see savings rate fall

Savers could start to see savings rates fall in the second half of April as the Bank of England has announced that the start of its Term Funding Scheme with additional incentives for SMEs (TFSME) has been brought forward to Wednesday 15 April 2020.

The TFSME was a scheme decided by the Bank of England in a special meeting on 10 March 2020, during which it also decided to cut base rate. The scheme is part of a series of measures announced by the Bank of England and HM Treasury to help businesses and consumers during the economic disruption, caused by the Coronavirus pandemic.

The TFSME has been introduced to help eligible banks and building societies lend money to businesses and consumers by allowing them to access four-year funding at rates very close to base rate, including additional incentives to encourage lending to SMEs.

Due to participating banks and building societies being able to access funding at a low rate, it will likely result in them becoming less dependent on attracting deposits from savers to help fund their lending. As such, savers could see already low savings rates fall further in the weeks and months after the scheme is launched.

This is not the first time the Bank of England has introduced this type of scheme to encourage banks and building societies to lend money. The first scheme called the Funding for Lending Scheme (FLS) was introduced in response to the financial crash of 2008/09 and was launched in July 2012, but banks and building societies did not start drawing money from the scheme until August. In June 2012, a month before the scheme was launched, average easy access savings rates stood at 1.01%, average one-year fixed bond rates stood at 2.61% and the average five-year fixed bond rates stood at 3.95%. In September, two months after the scheme was launched and just one month after providers started drawing money, average easy access rates had fallen to 1.00%, one-year fixed bond rates fell to 2.55% and five-year fixed bond rates fell to 3.73%. By the end of the year in December 2012, rates had fallen to 0.87%, 2.11% and 2.82% respectively.

Fall in average savings rate in 2012

A similar pattern can be seen when Term Funding Scheme (TFS) was introduced in August 2016, which essentially extended the original FLS. In July 2016, the average easy access savings rate stood at 0.56%, the average one-year fixed bond rate stood at 1.20% and the average five-year fixed bond rate was 2.05%. In September, the average easy access saving rate had fallen to 0.48%, the average one-year fixed bond rate had fallen to 1.02% and the average five-year fixed bond rate was down to 1.69%. By December 2016, the average rates stood at 0.39%, 0.95% and 1.67% respectively.

Fall in average savings rates in 2016

Commenting on the impact TFSME could have on savings rates, Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “The government Funding for Lending scheme devastated the savings market back in 2012 and this impact was further extended four years later when the Term Funding Scheme was introduced. If providers can borrow cheaply from the Government then they do not need to rely on saver’s deposits like they used to in the past, so competition dries up and savings rates plummet. The new lending scheme coupled with two recent base rate cuts is bad news for savers, so more than ever, it is imperative that consumers keep a close eye on the top rate deals and act quickly to apply. It’s important that they put some time aside to check any existing accounts they have and not be discouraged to switch to ensure they are getting the best possible return on their hard-earned cash.”