POST OFFICE SAVINGS BANK INTEREST RATE (Increase suggested to match higher Bank Rate and encourage savings)

Increase suggested to match higher Bank Rate and encourage savings

Mr William Tan asked the Financial Secretary whether in view of the recent increase in the bank rates and in view of the necessity to encourage more savings he will take steps, if necessary by amending legislation, with the object of raising the rate of interest payable on deposits in the Post Office Savings Bank.

Mr T. M. Hart: Sir, the matter has been considered but it has been decided that it would not be appropriate to change the rate of interest paid by the Post Office Savings Bank.

The P.O. Savings Bank does not compete with commercial banks or borrowers appealing to investors in the stock market. It does not raise or lower its rate of interest on deposits in sympathy with movements in the stock exchange. It aims at giving people in the lower income group easy facilities for saving small amounts in circumstances of absolute security, and guarantees a rate of interest which remains steady and certain over the years and which is reasonable having regard to the security and the facilities afforded by the Bank. In this connection it is perhaps interesting to note that despite booms and depressions, disasters and victories, the rate of interest paid by the P.O. Savings Bank in the United Kingdom has remained at 2 per cent since 1864; while the rate of interest paid by the P.O. Savings Bank in the United States of America has remained at 2 per cent since 1910.

It is open to doubt whether the P.O. Savings Bank could in fact raise the rate of interest at the present time even if it were regarded as politic to do so. As the hon., Member is no doubt aware; the P.O. Savings Bank is intended to be a self-supporting institution. Its deposits are required by law to be invested in trustee stocks, which yield a comparatively low rate of interest. Its income is derived solely from interest from these investments. From this income, it must meet its operating costs and pay the rate of interest on deposits, which is prescribed by law. It should also, if circumstances permit, build up a reserve against depreciation of investments. If its income is insufficient to meet running expenses and statutory interest charges, the deficit must, by law, be made good by Government. The financial position of the Bank at the present time has been examined. Indications clearly are that if the rate of interest were to be now raised to 3 per cent - which would still be low compared with the yields obtainable elsewhere under stable and secure investment - the Bank would find difficulty in meeting its running expenses and interest charges, and the deficit would have to be met from the general revenue by Government. Such a situation would not, I am sure, be in accordance with the wishes of the hon. Member.