BoE 2025 Report: Banks Maintain Interest Rate Spreads

Latest BoE Report : Banks Maintain Interest Rate Spreads 

 


8th May 2025

 

The latest Bank of England Statistical Release on effective interest rates covers the period up to 31st March 2025. It shows a continuation of the pattern for this year that small movements in short term market interest rates are feeding through to the banks customers.

This data confirms that the real cost of banking has increased over the past two years by virtue of the banks not pro-actively passing on the benefits of their higher interest rate margins.


The statistics tally with the Bankhawk corporate benchmarks and show that most businesses have legacy banking arrangements and accordingly do not benefit from higher market interest rates. Those that have bank borrowings have higher interest costs but those that have cash at bank lose more interest margin.  

Apart from addressing the profit leakages above Finance Leaders need to focus also on risk and ensure that the return on bank funds takes into account market rates and an appropriate risk premium.    

The Bank of England lowered interest rates today from 4.5% to 4.25%. This will reduce the real cost of banking for most companies but not sufficiently according to the data.

   

 

Key Insights from the Latest Data

 
The Bank of England’s effective interest rates for March, published on 1st May 2025 reveal a modest rise across various deposit and loan categories:

  • Sight Deposits: Rates decreased from 2.46% in February to 2.37% in March. This return remains well below the level corporate customers could achieve through more competitive arrangements.

 

  • Time Deposits: Rates fell from 4.02% to 3.98%, reflecting anticipated declines in market rates.

 

  • Loans: Effective rates dropped marginally from 6.38% to 6.34%, indicating lower borrowing costs for businesses. These rates remain high which will be a concern for companies with high borrowings.

The net interest margin for banks remains elevated. Businesses with legacy banking structures are not benefitting from the higher interest rate environment generally.

 

Addressing the Disparity

 
The gap between the returns businesses receive on bank funds and the rates they pay on borrowings underscores the need for proactive financial management. Companies actively reviewing and renegotiating their banking relationships achieve significantly better outcomes. For instance, Bankhawk’s benchmarks show that optimally structured banking arrangements can generate significantly improved profitability.

 

The Path Forward

 
To mitigate this growing issue, businesses should:

  • Benchmark Current Arrangements: Understanding how your effective rates compare to market averages is a crucial first step.

 

  • Engage in Active Negotiation: Leverage data to secure better terms on both deposits and loans.

 

  • Adopt a Proactive Approach: Regularly review and adapt banking strategies to remain competitive.

The latest figures reiterate the importance of taking action now. With banks increasingly profiting from widened net interest margins, businesses must ensure their financial strategies are optimized to safeguard their profitability.

 

 

PNFCs deposits and loans

A PNFC is a private non-financial corporation.

 

Effective interest rates for: PNFC’s on stock outstanding of deposits and loans:

 

Outstanding facilities

 

  1. The effective rate for sight deposits decreased by 0.09% from 2.46% in February to 2.37% in March.
  2. The effective rate for time decreased by 0.04% from 4.02% in February to 3.98% in March.
  3. The effective rate for loans decreased by 0.04% from 6.38% in February to 6.34% in March.

 

Effective interest rates for: PNFC’s on new deposits and loans:

 

 

New business

 

  1. The effective rate for time deposits increased by 0.05% from 3.90% in February to 3.95% in March.
  2. The effective rate for loans increased by 0.01% from 6.20% in February to 6.21% in March.

 

Table: Effective Interest Rates paid/received on PNFC balances by UK MFI’s (excluding Central Bank)

 
Per cent – Not seasonally adjusted

 

 

 

 

Source: Bank of England – Statistics – Published May 2025

 

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