Businesses losing £10.6bn a year as inflation erodes cash left in bank

Publications that covered this article included, the Daily Mail, 26 September 2011, City AM, 26 September 2011 and the Financial Times, 26 September 2011.

UK businesses* are losing more than £10bn a year as inflation erodes any interest earned by their bank deposits, according to our new research. (See table below)

Low interest rates across business accounts, combined with high levels of inflation (RPI 5.2%) means that businesses savings are gradually declining in value.

Our research points out that deposits from businesses at UK banks are on the rise and have nearly doubled in the last decade, up 77% from £136 billion in July 2001 to £242 billion in July 2011 (excludes financial sector businesses) (See graph below)

Derek Levy, Partner in our London office, comments: “Banks have improved their lending margins partly by offering businesses such low rates on their cash deposits. Businesses are now getting a pretty poor deal on all of the basic cash deposit products.

“While many larger corporations may have Treasury departments responsible for managing the company’s cash, most small businesses can’t afford this luxury. As such, savings are often left to stagnate in accounts offering little or no interest.”

“In this climate of low interest rates and high inflation, business owners really need to be more pro-active and shop around for the best rates, even if these are hard to come by.”

Bank of England figures reveal that £37.7 billion is currently deposited in business accounts yielding 0% interest. Our research points out that money deposited in these non-interest bearing accounts, as well as any account offering interest rates below inflation, will actually decline in value on a monthly basis.

Businesses need to consider whether they really need to keep building up cash balances just to see the value destroyed by inflation.

Derek explains: “Many businesses would be better off distributing money to shareholders or investing the cash back into the business.”

“A lot of businesses that could do with investing in their business assets – their IT or machinery – but, because of the economic uncertainty, instead just build up a cash cushion.”

“This may in part be due to the worry that should businesses need to turn to the banks for financial help, the help might not be forthcoming.”

Our research explains that the consolidation of several banks and building societies during the financial crisis may have stifled competition over rates.

Comments Derek: “A lack of competition has created a market where banks can get by offering businesses interest rates far below inflation.”

“Businesses typically need more flexibility from their deposit accounts than traditional savers. At present there are very few good accounts out there that cater to the needs of businesses while offering a favourable interest rate.”

* Figures are for all UK Private non-financial institutions

Interest on UK businesses bank deposits eroded by inflation

Total deposited in banks by UK businesses (PNFCs)

£241,540 million

Annual interest on this amount

£1,432 million

 

 

Value of deposits eroded by inflation in a year before interest (RPI)

£12,077 million

Value of deposits eroded by inflation in a year before interest (CPI)

£10,628 million

 

 

Value of deposits eroded by inflation in a year after interest (RPI)

£10,645 million

Value of deposits eroded by inflation in a year after interest (CPI)

£9,196 million