Pressure on banks to pass on rate cut

The Bank of England said it had been forced into the move, which leaves the base rate at 3 per cent, by the global financial crisis and threat of a deep and long lasting recession.

The Bank's move brought jubilation to the property market and the business community.

● The shock cut is the biggest since March 1981 and lowers the base rate to three per cent, a level not seen since 1955.

● The Bank said it had been forced into the move by the worst financial crisis "for almost a century" but critics said it was a sign of panic.

● The move will hack about £180 a month or £2,160 a year from the mortgage bills of London homeowners with a typical £200,000 tracker mortgage.

● The Government called on banks to "do their bit" by passing on the full rate cut. But only Lloyds TSB and the Cheltenham & Gloucester initially pledged to pass on the whole cut.

● It comes on the day that Halifax revealed that house prices have fallen 15 per cent in a year.

● Shares bounced but soon slumped over fears that the economy is in worse shape than previously thought.

● The pound fell almost a cent against the dollar to $1.596.

Within three quarters of an hour the Bank's move was followed by a half point cut on Euro interest rates to 3.25 per cent.

The Bank has not lowered rates by more than half a point since it was granted independence in 1997. But in proportionate terms, today's one third cut in the rate is the deepest since it went from three to two per cent in October 1939, just after the declaration of war with Germany.

Treasury chief secretary Yvette Cooper, said: "This was a strong and decisive move by the Bank of England. It's so important that the banks now do their bit. Because they are getting help from the Government, they are effectively getting support from the taxpayers. The responsibility on them is to do their bit to support people right across the country who might be worried about their mortgage."

But many major lenders such as Barclays and HSBC said they would only "review" the cut before deciding how much to pass on to customers.
Only Cheltenham & Gloucester and Lloyds TSB said customers would get the full 1.5 per cent benefit of the cut.

Paul Thurston, managing director of HSBC, said: "HSBC will be passing on the base rate change to the vast majority of our mortgage customers. Small and Medium Enterprise customers whose borrowings are linked to the bank base rate will also see rates reduce by the full 1.5 per cent."

The much bigger than expected reduction will bring an immediate benefit to the estimated 30 per cent of homeowners on tracker mortgages that move in line with the Bank's base rate.

However, for the 50 per cent on fixed mortgages there will be no change until deals expire. But for around 20 per cent of mortgages linked to lenders' standard variable rates it is up to banks and building societies whether they pass them on.

First-time buyers will also hope that they will benefit as rates for new purchasers are reduced.
Only around half of lenders passed on any of the last 0.5 per cent rate cut last month and less than a fifth cut standard rates by the full amount. Banks say they are limited by borrowings costs in the interbank market.

The Bank of England said: "Since mid-September, the global banking system has experienced its most serious disruption for almost a century.
"While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time."

It said inflation, which is thought to have peaked at 5.2 per cent in September, should "soon drop back sharply" following the halving of oil prices and steep falls in commodity and food costs since the summer. It said that without a major boost to the economy through lower interest rates inflation would fall below its two per cent target rate.

Michael Coogan, director general of the Council of Mortgage Lenders, said: "This is a strong and decisive move by the Bank of England. What is important is how this feeds through to lenders' borrowing costs."

Shadow chancellor George Osborne said the economy was in "very serious trouble" and called for banks in a stable position to pass on the rate cut in full. Liberal Democrat Treasury spokesman Vince Cable predicted interest rates could fall to zero. He praised the "radical" action but said: "It's not adequate. There will almost certainly have to be further cuts."

The last time the rate fell by more was in the early-Eighties recession when there was a two per cent cut from 14 per cent to 12 per cent.