The theory behind current monetary policy is quite simple – lower interest rates and people should spend more because there is no real incentive to save cash or repay cheaper mortgages.
New figures from the British Bankers’ Association (BBA) suggest that this has not been happening in practice.
In fact, savers have continued to save, despite record low interest rates.
Personal deposits in British banks were up by 5.5% for the year to April, despite interest rates on cash savings as low as 0.1%.
So why the increase in savings despite these low interest rates?
Consumer confidence is likely to be driving these savings decisions.
Although the return on cash is so low, and is negative in real (after inflation) terms, savers would prefer the certainty of cash to the uncertainty of spending the money or using it to repay debt secured against property assets.
There is some evidence that borrowers are repaying debt, although the figures on that side might be distorted by the continued lack of lending from the banks.
Mortgage repayments exceeded new borrowing on unsecured loans and overdrafts by 6.7% over the course of the year.
We could take these figures to mean that consumers prefer to save and repay debt than spend on the High Street. The most recent set of retail sales figures give weight to this conclusion.
Savers now have some £721bn on deposit at the banks, still marginally below the £779bn in mortgage lending from the major British banks.
On an individual level, we all need to consider what is a suitable level of cash savings and debt borrowing based on our personal circumstances, goals and objectives.
