Interest rates - 'A reduction in rates by all would bring relief'

Published on Saturday 8 November 2008 10:05

IT would have been expected by many that this week's massive 1.5 per cent cut in interest rates by the Bank of England would have resulted in all lenders immediately lowering their rates. But despite some now promising to do so this has not happened.

Pressure is now being applied on all banks to follow suit and yesterday Alistair Darling summoned the chief executives of the country's biggest lenders to a meeting where he told them bluntly that he expected them to respond to the largest single reduction in rates in almost 30 years.

But to date only a handful of major lenders have done so with only Lloyds and the Abbey cutting their standard variable rates – the key rate that homeowners want to see reduced.

Instead around 30 lenders as a first step reacted by withdrawing their range of tracker loans for new customers, which automatically move up and down in line with the Bank of England base rate, for repricing. A move that has effectively removed that prospect of cheaper loans in the short term.

There will be anger that the banks have not responded more quickly – particularly those that have shared in the Government's recent 500 billion bail-out and are now effectively part-owned by the taxpayer.

As with petrol prices, when the raw cost falls consumers expect these savings to be reflected at the pumps but there will be disappointment that others appear to be stalling on passing on savings to customers.

A reduction in rates by all would bring welcome relief, particularly to homeowners and small businesses. KMPG reported yesterday that the number of borrowers seeking help with their mortgages now accounts for 45 per cent of all inquiries, compared to 30 per cent last year while the number of companies it put into administration has also soared by 50 per cent in the last 12 months.

It would be good if the banks could lower rates quickly, passing savings on to customers. But the situation is slightly more complicated. After taking a pasting some banks need to be allowed to get back on their own feet and off the taxpayers' books. But as long as the libor rate – the rate at which banks lend to each other – remains high they will be reluctant to lower interest rates for customers. But the pressure will grow – particularly on those who have received public help – to cut their rates now and help stabilise the economy. Many have enjoyed the profitable good times . . . now they must share in the bad.