Dilemma for banks after rates cut

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On Thursday the Bank stunned the City by opting for the biggest rate cut since 1981, at a time when the base rate is relatively low.

Lloyds TSB immediately announced it was following suit - though it is constrained by a pledge to keep its rates within 2% of the Bank of England's base rate - and by the end of the day Abbey had done likewise.

Halifax, the UK's biggest lender, said on Thursday whether it was to pass on the 1.5% cut was "under consideration" as politicians clamoured for banks to toe the line in return for the billions of pounds the Government has pumped into propping them up in the aftermath of the credit crunch.

Banks, though, are wary of committing themselves to interest rates cuts while the Libor (the London Interbank Offered Rate) - the rate at which banks lend to each other - remains high and while jitters persist following the recent financial turmoil.

Following the announcement, around 30 lenders pulled their range of the tracker loans, which automatically move up and down in line with the Bank of England base rate, for repricing.

And experts fear banks will not pass on all of the interest rate cut to customers - if they did, some homeowners could save up to £230 a month.

The key rate that homeowners want to see reduction in is the Standard Variable Rate (SVR), which is supposed to fluctuate in line with the Bank of England's base rate.

But unlike tracker rates, this does not automatically happen - the onus is on the banks to cut their rates as the Bank of England does. Banks tends to be quicker to respond to Bank of England rate hikes than cuts.

Among the 30 who withdrew their tracker deals yesterday were Halifax, Nationwide, Abbey, Barclays' lending arm the Woolwich and Lloyds TSB.