Explanatory Notes - Effective interest rates
OVERVIEW
AVAILABILITY
SOURCES
REVISIONS
DEFINITIONS
VALUATION AND BREAKS
FURTHER INFORMATION
The effective interest rate is the weighted average of all the interest rates across each type of deposit or loan account held by all the clients within an economic sector. The Bank calculates average effective rates as weighted averages of the effective interest rates supplied by each of the reporting banks.
Data are available monthly from January 2004. The data are not seasonally adjusted. Publication of data occurs on the 21st working day of each month on the Interactive Database, please follow this link http://www.bankofengland.co.uk/mfsd/iadb, and in Bankstats table G1.4. See the schedule of releases.
These data are sourced from the Bank's Effective Interest Rates Return, Form ER, completed by 29 banks. The sample is reviewed regularly to ensure that it remains representative of banks’ lending to and deposits accepted from UK-resident individuals and organisations. The sample is designed to give a minimum coverage target of 75% for banks’ business with each of the main sectors of the economy.
The reporting banks are selected from a population of around 400 UK-resident banks using stratified sampling techniques, where each stratum represented an economic sector or product type. To achieve the 75% target with the fewest banks – and thus limit the cost burden on the banking industry – the largest banks by market share were selected within each stratum.
All data are subject to revision if and when new data become available. Revisions are highlighted where data have been revised by more than the thresholds set when compared to previously published data. The thresholds are set so that, historically, the most significant 10% of revisions greater than one basis point would be flagged.
Unless otherwise stated revisions to data are due to changes to the underlying contributors’ reported data. For more information on revisions practices see the Explanatory Note on revisions, available here.
Effective rate calculation
Effective rates are calculated as a function of average loan/deposit balances and interest payable/receivable on those balances. It is expressed in the following terms:
Interest Flow No. of days in Year
x x 100
Average (daily) No. of days in
Balance Month
For example, if, during January 2005, a bank on average held £50 billion of household savings deposits, on which interest totalling £150 million was payable, the effective interest rate would be:
£150mn 365
x x 100 = 3.53%
£50bn 31
The deposits might be held in millions of separate accounts with numerous different terms and interest rates, none of which might actually be 3.53%. The effective interest rate is the weighted average of all the interest rates across all the deposit accounts held by all the clients within this economic sector. The Bank calculates average effective rates as weighted averages of the effective interest rates supplied by each of the reporting banks.
Sectorisation
Households and Individual Trusts
This sector is sub-divided into two groups: Individuals & Individual Trusts and Unincorporated UK Businesses other than Unlimited Liability Partnerships. The inclusion of unincorporated businesses resident on the UK mainland other than unlimited liability partnerships (i.e. sole traders) was a direct result of the implementation of the European System of Accounts 1995 (ESA95) at the end of 1996. This sector therefore has a wider coverage than the former sector ‘individuals and individual trusts’
Products
Sight deposits
Sight deposits (instant access deposits) are interest bearing accounts (be it branch based, business, Internet, telephone or postal accounts) where the depositor has access to the entire balance of the deposit, without incurring any penalty, either on demand or by close of business the day following that on which the deposit was made.
Time deposits
Time deposits are interest bearing deposits that are not classified as sight deposits. These are deposits where only part of the balance is accessible without penalty, either on demand or by close of business on the day following that on which the deposit was made. Postal deposit accounts (excluding those with alternative instant access arrangements such as via ATMs or immediate transfer to a sight account e.g. by telephone or Internet) are also classified as time deposits. This is due to the postal element resulting in a delay in the customer using the money even if the bank responds to their request by return post.
Some reporting institutions operate deposit products which do not pay interest monthly but instead offer a single interest payment after 12, 24 or 36 months linked to the performance of an index such as the FTSE100. The balances on these products and the single interest payment are included in the rates calculations without adjustments so may affect some of the rates published for time deposits. We will review this treatment in the future.
Loans secured on dwellings (excluding bridging loans)
These include all mortgage loans to individuals (apart from bridging loans) secured on properties. Loans for home improvements, house repairs and maintenance also secured by a first charge over the property, and mortgage sub participations fully and specifically secured against residential mortgage loans are also included. This average rate also includes some preferential rate loans such as staff mortgages from the reporting institution. However, these only account for a very small proportion of the total.
The Bank of England began collecting effective interest rates from a panel of UK resident banks in 1992. The main purpose then was to meet the needs of the Office for National Statistics in the compilation of the national accounts. During the 1990s demand from monetary policy users grew, for example in monitoring the impact of changes in the official interest rate, the Bank rate. The survey became monthly in 1998 and was made statutory under the Bank of England Act in 2000. The results have been published in Table G1.4 since February 2001. In January 2004 the Bank expanded the sample of reporting banks and introduced an expanded survey form to meet users’ needs for more detailed information.
Due to the new form, the sample was expanded in January 2004, and improved calculation methodology adopted by reporting banks. This means that a direct comparison between December 2003 and January 2004 cannot always be made. For series starting in 1999 the Bank estimates that these improvements had the following effects on the January 2004 rates:
| Series | Effect of improvements in January 2004 (pp) | Series | Effect of improvements in January 2004 (pp) |
| HSCP | 0.20 | HSCZ |
0.50 |
| HSDM | 0.20 | HSDO | 0.00 |
| HSCR | -0.10 | HSDA | 0.00 |
| HSCT | 0.10 | HSDC | -0.10 |
| HSCV | 0.20 | HSDI | -0.10 |
| HSCX | 0.20 | HSDK | 0.00 |
| HSCQ | 0.20 | HSDB | 0.00 |
| HSDN | 0.20 | HSDH | 0.00 |
| HSCS | 0.10 | HSDJ | -0.20 |
| HSCU | 0.10 | HSDD | -1.00 |
| HSCW | -0.10 | HSDE | -0.10 |
| HSCY | 0.10 | HSDG | 0.30 |
Relevant material published:
Update of effective interest rates data by Deborah Gould and Gemma Teggart, Monetary and Financial Statistics (Bankstats) March 2008
http://www.bankofengland.co.uk/statistics/ms/articles.htm#2008
New range of effective interest rates by Hannah Reynolds, Michelle Ryan and Jonathan Bailey, Monetary and Financial Statistics (Bankstats) May 2005
http://www.bankofengland.co.uk/statistics/ms/articles.htm#2005
