Withdrawals from savings accounts reached a record high in May, with UK households withdrawing £3.8 billion ($4.8 billion), according to Bank of England data. This outflow marks the largest monthly withdrawal in 26 years since records began in 1997.
The spike in withdrawals was primarily from easy-access savings accounts, with a total of $18.5 billion being withdrawn in May. However, it is worth noting that some of this cash was likely redirected into fixed rate savings accounts and individual savings accounts (ISAs), which offer higher interest rates and tax-free benefits. Additionally, Britons deposited over $1 billion into the government’s National Savings and Investment bank, indicating a redirection of funds towards more secure options.
The cause behind this surge in withdrawals is the Bank of England’s efforts to address stubbornly high inflation. As the central bank raises interest rates to control inflation, home loan payments have also increased, exacerbating the cost-of-living crisis. Consequently, the rise in borrowing costs has led to a slowdown in borrowing.
To make matters worse, major UK lenders recently announced another increase in mortgage rates offered via brokers. As a result, the average mortgage rate has surpassed 6% in many cases, further straining the housing market and discouraging potential borrowers.
While the number of mortgage approvals in May saw a slight increase compared to the previous month, it remains lower than pre-pandemic levels. In May 2022, before the rise in borrowing costs, approximately 66,000 mortgages were approved, whereas in May 2023, only 50,524 were granted. This decline indicates that higher interest rates have started to affect the housing market, leading to a decrease in demand.
Economist Ashley Webb from consultancy Capital Economics predicts that consumer lending will continue to decline in the coming months as households grapple with the growing burden of higher interest rates. As a result, households may cut back on their spending and borrowing, creating further challenges for the economy.
The implications of this trend extend beyond individual households. With lower consumer lending likely on the horizon, businesses may also face a decrease in demand, which could hamper economic growth. Additionally, the decrease in savings account balances may impact the ability of households to withstand financial shocks, making them more vulnerable to economic downturns.
Overall, the record high withdrawals from savings accounts in May highlight the challenges faced by UK households as borrowing costs rise. With the cost-of-living crisis intensifying and interest rates increasing, individuals are opting to withdraw their savings, potentially redirecting these funds into more lucrative or secure options. However, this trend also sparks concerns about the future stability of households and the broader economy.