Friday, 24 December 2010

UK Economy - Household bank deposits shrink

Negative real interest rates have destroyed any incentive to use the UK banking system as a means of saving. Near zeri rates gave ensured that household checking deposits are declining, while the growth of time deposits has fallen sharply.

At first glance, this may not seem much of a problem. After all, the Bank of England wanted the nation's households to go out and spend. Higher savings rates means lower consumption and lower output.

However, the Bank of England also wanted commercial banks to find more stable sources of financing. The wholesale money markets have proved to be too volatile. Furthermore, UK banks have a large amount of funding maturing next year. Some banks may find it difficult to replace that funding at low interest rates.

Household deposits would provide a more stable alternative to flighty capital from the wholesale market. Unfortunately, householders need to receive a positive rate of return before they put money in a bank.

This is just one more reason why UK interest rates must rise.


Rick said...

It seemed like a mad policy from the start for the very reasons that you mention.

Banks with insufficient money from retail deposits going to the money markets to borrow short term at low rates to lend long is what got us into this mess. The BoEs actions have made this even worse - I think we're all in for a second shock in early 2011.

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