The governments of the UK and Belgium have launched state-backed savings plans that offer higher interest rates than most commercial banks. The move is aimed at forcing banks to compete for savers’ money and pass on the benefits of rising official interest rates.
UK’s NS&I Bonds Pay 6.2% for One Year
National Savings & Investments (NS&I), the UK state-owned savings bank, is offering one-year retail savings bonds paying 6.2%, the highest interest rate available since the institution took over government-backed savings programs in 2008. The bonds are available from a minimum of £500 up to £1 million, and are government guaranteed.
The 6.2% rate is nearly a full percentage point more than the current Bank of England rate, which stands at 5.25% after several hikes in the past year. It is also more than the 6% rate offered by some smaller commercial lenders, such as Atom Bank and Zopa Bank.
The NS&I bonds are aimed at attracting some of the £200 billion ($250 billion) of excess savings that Britons accumulated during the pandemic lockdowns. The Office for National Statistics estimates that the UK annual savings ratio, which measures the amount households retain of their disposable income after consumption, soared to more than 20% during the pandemic. It is still at an elevated level compared with the long years when official rates were stuck close to zero.
By offering such a high rate, NS&I is stepping right on the toes of recalcitrant banks and building societies (the UK equivalent of savings and loans companies), which typically pass on higher interest rates to borrowers more quickly than they do to savers, seeking to benefit from a fatter margin between what they charge for loans and what they pay out to customers who provide the funds.
Belgium’s Retail Savings Bonds Force Banks to Fight for Savers
Belgium has also sold longer-term retail savings bonds this year, with its Prime Minister Alexander De Croo stating that the nation’s banks will be forced to “fight again” for savers. The bonds have maturities ranging from three to 10 years, and pay interest rates between 1.5% and 3%, depending on the term.
The Belgian government has raised about €4 billion ($4.7 billion) from the retail bond sales so far this year, exceeding its initial target of €3 billion. The bonds are tax-free for Belgian residents, making them more attractive than bank deposits, which are subject to a withholding tax of 15%.
The retail bond sales are part of Belgium’s plan to finance its €5.9 billion ($6.9 billion) stimulus package, which includes measures to support businesses, workers, and health care amid the pandemic recovery. The government also wants to encourage Belgians to invest their excess savings, which amount to about €40 billion ($47 billion), according to the National Bank of Belgium.
By offering competitive rates and tax benefits, the Belgian government is putting pressure on banks to increase their savings rates, which have been languishing at low levels for years. The average interest rate on regulated savings accounts in Belgium was only 0.11% in July, according to the central bank.
Other Countries May Follow Suit
The UK and Belgium are not the only countries that have used state-backed savings plans to force banks to offer better rates for savers. Italy has long offered a wide range of attractively priced government bonds targeting retail investors with tax benefits. France has a popular savings scheme called Livret A, which pays a guaranteed rate of 0.5%, tax-free.
Other countries may follow suit as official interest rates rise around the world in response to rapid inflation. The US Federal Reserve has hiked interest rates by 0.25 percentage points in February, after making several 0.75 point rises last year. This has lifted rates from near zero in early 2022 to a range of 4.5-4.75%, their highest level since October 2007.
Muscling into the savings marketplace by governments with burgeoning borrowing needs might just catch on, employing competitive carrots rather than regulatory sticks.
