• There were 818,500 mortgage approvals for house purchase in 2020, the largest number in one year since 2007, according to Bank of England data released today
• A further £2.7 billion was withdrawn from NS&I accounts in December, following a £6.3 billion withdrawal in November
• A further £20.9 billion was saved into bank and building society deposit accounts in December, taking the 2020 total to £152.6 billion, up from £55.3 billion in 2019
• Consumers paid down a record £16.6 billion in debt in 2020
• This Thursday sees the first Bank of England interest rate decision of 2021
Laith Khalaf, financial analyst at AJ Bell, comments:
“You wouldn’t guess there was a devastating international crisis in 2020 simply by looking at consumer banking activity. All the dials suggest it was a great year for personal finances in the UK. Mortgage approvals were at their highest level since 2007, consumers paid down a record amount of debt, and at the same time saved almost £100 billion more in cash than last year.
“The reality is, for many people, the pandemic has seen their financial position improve, thanks to spending options being decimated by lockdown. Of course that’s not universally the case, and with unemployment at 5% and rising, there is clearly financial hardship at play as well. However an overall reduction in consumer debt, combined with high levels of cash savings, and pent up demand for holidays, meals out and other leisure activities, could prove to be an explosive powder keg that will help drive the economy when it finally opens up again.
“There are some warning signs in the data too though. The fact mortgage approvals are at their highest level since 2007 sets alarm bells ringing given what happened in 2008. The expiry of the stamp duty holiday at the end of March will likely take some steam out of the housing market, and many would view that as a positive thing, particularly those saving for a house deposit. The good news is that mortgage lending is much more responsible today than before the financial crisis, which means there should be no systemic problem with the banking sector as a result of a slowdown in the property market.
“The other clear indicator that life isn’t as rosy as it first seems is that interest rates are at rock bottom rates. More money flowed out of NS&I, which puts the savings provider below its financing target for this year. It will be hoping the next few months see money trickling back in, particularly as ISA season beckons. But its November interest rate cuts were drastic, and as a result its Cash ISA is going to be pretty low down the best buy lists.
“Meanwhile the average interest rate paid on the average instant access account is 0.12%, and £225 billion sits in accounts paying no interest whatsoever. There’s no end in sight to the long drought suffered by Cash ISA savers, and the Bank of England isn’t likely to throw them a bone at its next interest rate decision on Thursday. Indeed the market is now pricing in a four in ten chance of a rate cut this year.
“Given the economic damage from the pandemic is still unfolding, the Bank’s interest rate committee will probably sit on their hands for now, particularly seeing as they are running out of monetary policy ammunition. The Treasury is throwing vast sums of money at the economy, and that means monetary policy doesn’t have to do all the heavy lifting. Indeed part of the challenge currently faced by the central bank is that economic data are currently distorted by the Treasury’s coronavirus support measures, and it remains to be seen just how badly the economy has been scarred once these sticking plasters have been removed.
“Further down the line the MPC may decide further stimulus is required, and negative interest rates are one tool they have brandished. At the moment it looks like the Bank are trying to have their cake and eat it; by talking up the possibility of a negative base rate, they are encouraging lower borrowing rates in the market without actually having to shift policy. However, that doesn’t mean that ultimately the MPC won’t go there, though this will depend on whether commercial banks can handle negative rates, which the central bank is currently investigating. Either way, the outlook for cash savers remains pretty bleak. If the last ten years have taught us anything, it’s that interest rates can stay lower than we imagine, for longer than we expect.”
