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Pressure on banks to pass on rate cut
Jonathan Prynn, Consumer Affairs Editor06.11.08
Banks and building societies today faced massive pressure to pass on in full to homeowners today's 1.5 per cent cut in the base rate.
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.
Reader views (38)
We took out a fixed rate mortgage at the turn of the year, there wasn't any talk of credit crunch then, I had a good job and my home was affordable. now since the credit crunch started, the company I worked for closed, I lost my job and the value of my home has tumbled. I cant sell it because there are no buyers.
I have since obtained a new job, however the pay is much lower than I had previously, but it is a job. Now I'm struggling with payments on the mortgage and struggling to put a meal on the table. Why not help people on fixed rates? The people on fixed rates took these same fixed rates at an affordable level because we couldn't afford to gamble with variable or tracker rates. We are the hardest hit yet no-ones going to help us. Typical of society yet again. Help those who can afford, yet discriminate against those who can't.
- Alan, West Lothian, Scotland
I feel completely betrayed by my bank (HSBC), infact I feel as though they (and other banks) have conned millions of us who have "gambled" on a variable rate mortgage. We are all fully aware that with this type of mortgage our payments can go up or down depending on the BOE base rate (or so I thought!) as for years the standard variable rate of HSBC has followed suit with the BOE rate change. If this pattern would have continued my rate should be 2% lower than just over a month ago and my payments nearly £300 per month less. A huge help to me right now. I'm sure this £300 is now building a nice bonus for the marketing guys at HSBC who must have been planning this strategy for years when they sold their "Discounted Rate Mortgages"
- Adam, London
Well, don't forget, according to the press, the banks are still going to be paying their top staff huge bonuses totalling billions, this year. So they can't pass on interest cuts can they, when they have to keep tons in reserve for their own staff? (written ironically)
- Suzy, Essex
More proof of the government's incompetence in dealing with real-world issues.
Surely when the PM bailed out the banks with billions of pounds of our money, it should have occurred to him to place certain conditions on the bailout.
One of these conditions should have been that the banks cooperate with special measures taken by the government and the Bank of England to shore up the economy.
- Tim, London
Mervyn King, for someone with your financial and economic knowledge from decades within the field, what are you doing?
The Financial Institutions are in a dire mess, house prices sliding, unemployment rising, recession looming but all walking streets of UK know it, as can't get away from the reality. A reduction in interest rates was expected but on a calm, gradual sliding basis so as to not knock confidence in the markets further.
However, shouldn't you lot at the top on vast salaries, know how to deal with stress in a calm logical manner?Well no it seems, after todays vast panic reduction in interest rates.
The reality is we've a bunch of Bulls charging around Westminster and the MPC trying to bulldoze the economy further but hopefully they'll all charge into each other and knock some common sense in somewhere along the line.
Low interest rates for the past few years in the UK caused a lot of this problem in the first place as it was easier for people to borrow, get into debt and live beyond their means. There's no use bringing the rest of the worlds economies into the equation, as it was beyond obvious the UK alone, what with house prices and extortionate salaries, was a bubble waiting to burst.
Mervyn, lets get back to basics in the UK before any more half full thought out actions and address all the issues that has dragged the UK down. Be practical, on what will be achieved from actions taken.
- Theresa, London, London.
I guess Crash Gordon will not brag anymore that he is the economy savior... we are in recession.
- Georgie, Islington, London
The greedy bank bosses will do whatever they not, NOT what is right and good for the customers and economy. They only think of themselves personally and their bonuses and the share price. At times like these, there such be a "law against economic sabotage" and these bank bosses should be charged and hopefully imprisoned.
- George, London, UK
NI,
no one forced you to fix at high rates in the summer, time to take some personal responsibility.
- Scott, London
Anybody could do better than Brown. A total disaster.
- Phil Jones, London UK
The government owned bank called Northern Rock aren't passing this on (I am being forced else where due to their ludicrous variable rate) so why should other banks do so?
- Janine, London
Abbey failed to pass on last months cut and yet again has yet to decide on this curret rate cut. They are a total disgrace to the UK banking industry, the minute i find another lender i'm off. Never again will i consider doing business with them and I will ensure I pass my opinion on them to all that listen. SHABBY ABBEY
- George Whyte, London UK
Reminds me of Homer Simpson working in the power station which is just about to go to melt-down; he's panicing & randomly twiddling the controls in the vague hope that something good might happen...
- Rooster, London
Blair,Brown and Darling must be the most incompetent twerps since Wilson and Healy. you can always trust Labour to mess up the economy. God help us !!
- Michael, London
Its official, we are in the ...poop. You can cut interest rates to zero but you cant make people borrow. People who have debt of course benefit, but they are losing their jobs or are just standing still in economic terms, no matter what the cost of money is. The government are throwing everything at this and leaving themselves with very few alternatives should the situation get worse (which the law of averages, says it will) Easy credit is the cause of this current disaster and yet our leaders are throwing more money at it. I
'm forever blowing bubbles should be the new National Anthem. I am just an ordinary person with no qualifications but I can see total disaster and financial mayhem just around the corner.
- Bondy, London
Will they, heck! Banks are in it to make money. Just had a statement from Barclays, saying because I was overdrawn by £12 , they are going to charge me £22 for going into 'reserve', and, if I don't get my acct into credit within five days, a further £22, every 5 days. Crazy.
- Dhanraj, Basildon Essex
This Buffoon Brown seems to running from one madcap idea to another. Hasn't he done enough damage to the country? The massive cut in BoE interest rates will be a disaster. Savers will now find other places to put their money; billions will be shifted out of the UK and, once again, the banks will run dry. The money printing presses cannot be run for ever or we will be in Magubeland. Spenders, Mr Bloke, will only attract more imports, and with our currency dropping through the floor we will be in an even worse state. Spending what we do not have is what got us into the mess in the first place.
- Albert Hall, hove england
What's the betting that the Banks do not pass it on? i should imagine they will want to fill the boots of their shareholders with our money. The rich will always be rich.
- Kerry, purley
Just in time to pay the gas bill, the electricity, phone, water, penalty fine, bank charges, parking charges, tv licence, mobile, insurance and my travel card , now who is first.?
- Mr.S.Port, London
CUCKOO !!!
SPEND SPEND SPEND
With Money they do not own but will have to pay back.
That is how we got into this mess.
- Bernard Parke, GUILDFORD
Well that doesn't help those of us that were forced to sign fixed in the summer at very high interest rates.
- Nl, London
A total disaster for savers.
But Brown doesn't give a toss for savers or the older generation. Look how he has devastated pensions sine coming into power.
On top of that this charlatan spews out each week how he has helped the OAP's, what a joke. He and his crew has led us into this mess and will not accept the situation, as in the USA, TIME FOR CHANGE. Bring on the novice.
- Colin Sheard, Lancaster, England
The economic well-being of the nation does not require savers at this moment, it requires spenders. Derek's proposition is supported by the New Testament.
- Bloke, London
The MPC must be 'crackers'. And as for Gordon Brown who has lead us down a twelve year long blind alley and abandoned all of us who have led prudent financial lives and then awarded all the reckless spenders with lower interest rates so that they can continue in their feckless ways. If we were in a truly well run financial world Brown would be out of a job. And now he's Prime Minister for God's sake. I find it hard to find printable words to express my anger.
- John, Leighton Buzzard, Beds
This will only work if the Govt. introduces two tiers of lending.
1) Long term mortgage lending where all mortgages are taken out at fixed/capped rates for the duration of the loan. This will ensure that homeowners pay the lowest rates available and won't lose their homes as a result of rate rises. This should be no more than 1 or 2% above base.
2) Short term loans at a higher rate than mortgage rates, perhaps linked to RPI.
Hence after today's base rate cut mortgages should be no higher than 4% and short term loans should be no lower than 7%
- Adam, Harrow, UK
So one minute Gordon Brown is saying that the UK is best placed to deal with the Financial crisis then the Bank of England does this. It just shows what a big mess we are in and the Bank knows it.
- Nigel, Wimbledon
"No, Prime Minister, we are not passing on the interest rate fall to the public. You don't like that? Who do you think you are? Anyone would think we are living off the taxpayer, the way you rabbit on. And would you please get a move on with the next £15 billion. Bonus time will soon be with us."
- John Problem, Hackney Wick, London, UK
Those that borrow are rewarded, those that save are punished.
- Derek, london
I think Brown should introduce price controls on the essentials of everyday life such as gas and electricity, food and water, as well as rationing petrol for private users. Also controlling the price of products connected with health and hospialization.
- Robert El-Cid,, Hull, East Yorks.,
Managed to get a tracker at 0.1 above base rate 1 year ago and ever since then my repayments have been falling and falling... So has the value of my property, but that's another story....
- Mcw, London
The banks now need to rebuild their profits and stitching us up is their way of doing it.
The Abbey is a total disgrace and all other lenders should hold their heads in collective shame if they don't pass on the rate drop.
I, for one, will never borrow anything from the Abbey again on pure principle.
- Mark, st albans
Despite the Tax payer's bail out, how much of this will be passed on to borrowers? But you can bet that saver's rates will be cut with in days.
- Justin, London, England
Absolutely laughable.
Good work Gordo...sorry, Merv.
More debt is the way forward eh lads
- Lb, London
It will be very interesting to now watch what happens to savings rates.
These should go down too, which would notionally hurt savers, however no bank or building society will want to lose investors--thus expect some healthy, if not hefty competition here!
- William Grierson, Kimpton, UK
So much for an independant Bank of England!
- Des Egan, london, england
Savers lose out with lower rates of return and borrowers will still be shafted with high rates.
The only winners are the banks that we have bailed out. Nice one.
- Frank, Home Counties, England
Wow, the economic data the BoE is looking at must be even worse than we all thought...
- Matt, London
If it's passed on in full to me I'll be happy but I won't be spending on the High St.
The investment I hold, with which I planned to part-pay my mortgage off with, have taken a hammering recently so any saving will go straight back to the bank as increased mortgage repayments.
Merry Xmas!
- Mark, South-East London
Great news IF the banks pass it on.It would be scandalous if they failed to do so.Having almost committed financial suicide themselves they seem to be hellbent on condemning businesses and consumers alike to the same fate !!I am still waiting for last months cut to be passed on---they hide behind excuse after excuse and no doubt if libor rates dropped dramatically they would say they could not drop rates because base rates are to high. Its piracy on a grand scale!
- Stephen Cole, london uk
