The rate a bank pays on a savings account looks like a price the bank sets. In a sense it is, and the constraints on that decision are much tighter than they appear.
The bank is buying funding
Start here, because it reframes everything.
A deposit is not the bank looking after your money. It is the bank borrowing from you, unsecured, on terms that let you demand repayment immediately.
The bank then lends that money out at a higher rate, and the difference funds the operation and the profit.
Which means the deposit rate is a funding cost, and the bank sets it against the alternative cost of funding itself elsewhere.
The alternatives
A bank can fund itself through retail deposits, through wholesale borrowing from other institutions, through issuing bonds, or through central bank facilities where available.
Each has a cost and each has characteristics beyond cost.
Retail deposits are generally the cheapest and the stickiest — people move them slowly, which regulators like, because stable funding reduces the risk of a run.
Wholesale funding is faster to obtain and faster to disappear, which is precisely the pattern that has featured in several bank failures.
So a bank that already has plenty of stable deposits and limited lending demand has little reason to compete for more, regardless of what the central bank rate is doing.
Why your rate did not move when the central bank rate did
This is the question everybody actually has.
The central bank rate sets the cost at which banks transact with the central bank and with each other. It anchors the whole structure.
Pass-through to deposit rates is neither complete nor immediate, and it is famously asymmetric — increases pass through slowly, decreases quickly.
The reason is inertia. Most depositors do not move. A bank that raises rates must raise them on the whole existing balance, not just on new money, so the cost of attracting a little more is the cost of repricing everything.
Which makes it rational to leave the headline account low and offer better rates on separate products that new money can be directed into.
Which is why banks have so many accounts
The proliferation of savings products with slightly different names is not confusion. It is segmentation.
It allows the bank to pay a competitive rate to the minority who shop around while continuing to pay very little to the majority who do not.
Regulators in several markets have taken an interest in exactly this, requiring banks to communicate about closed or uncompetitive legacy accounts.
The results have been partial. The economics driving the behaviour have not changed.
Introductory rates and the mechanics of them
A bonus rate for twelve months, reverting afterwards, is a device for acquiring balances that the bank expects will not leave when the bonus ends.
The pricing assumes a certain attrition rate. If everybody moved on schedule, the product would not work.
Which means the profitable customers are the ones who forget, and the product is priced on the expectation that most people will.
Deposit insurance and what it covers
Worth being precise about, because the details matter and are widely misunderstood.
Government-backed deposit insurance covers balances up to a limit, per depositor, per institution, per ownership category.
Each of those qualifiers does work. Two accounts at the same bank generally share one limit. Two banks that turn out to be brands of the same licensed institution also share one limit, which surprises people.
Checking which licence a brand sits under is a two-minute exercise and it is the only way to know your actual coverage.
Inflation is the comparison that matters
A nominal rate tells you how the number grows. It does not tell you whether purchasing power is preserved.
Through the extended low-rate period, deposit rates were below inflation for years, which meant real value was eroding steadily while the balance rose slowly.
That is not an argument for any particular alternative. It is an argument for knowing which number you are looking at.
The limits of this
I am describing how deposit pricing works, not recommending where to put money. What suits a given household depends on circumstances I know nothing about, and anyone with a substantial decision to make should be getting regulated advice rather than reading articles.
The liquidity rules behind the scenes
A regulatory layer that shapes deposit pricing more than customers realise.
Banks must hold sufficient high-quality liquid assets against expected outflows in a stress scenario, under rules introduced after the financial crisis.
Different deposit types are assigned different assumed outflow rates — insured retail deposits from an established relationship are assumed to be stickiest, large uninsured corporate deposits least.
Which means a stable retail deposit requires the bank to hold less liquidity against it than a large volatile one, and is therefore worth more to the bank than the balance alone suggests.
This is why banks will sometimes pay more for small deposits than for large ones, which looks irrational and is not.
Notice and term accounts
Products requiring notice or fixing a term attract better rates for the same reason — they reduce the assumed outflow and improve the bank's funding profile.
The rate premium is compensation for that certainty rather than a reward for loyalty.