Lenders start to pass on rate cut

Nov 7 2008 by Karen Dent, The Journal

Banks, including Northern Rock, today showed they had heeded calls to cut interest rates in line with the Bank of England’s massive 1.5% cut.

Yesterday 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.

The Nationwide, HBOS, the RBS/NatWest group and nationalised Northern Rock today said they would cut their main variable lending rates by the full 1.5% on 1 December. Halifax, Standard Life and others are considering whether to cut their rates. Business leaders and 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 yesterday’s 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.

Jonathan Davis, director of financial advisors Armstrong Davis, said: ``What you have to remember is the banks nationally and globally have lost hundreds of billions, if not trillions, of pounds.

``Most of the banks will cut their variable rates but I’m not sure if they are going to cut them the whole 1.5%.

``They will want to claw back a little bit of profit and the banks will use all they can to shore up their reserves even if it takes them years and one way is not passing on the full cuts to borrowers."

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

A number of other lenders had previously hiked their tracker rates by up to 0.8% ahead of today’s base rate cut.

Ray Boulger, senior technical manager at John Charcol, said: ``We will have to wait several days before we see them re-emerge and know by how much lenders have hiked their rates above base rate."

Mr Boulger predicted the number of lenders who reduce their SVR by 1.5% will be in single figures.

The 1.5% cut would provide some much needed relief for hard pressed homeowners, reducing the monthly cost of a typical £150,000 mortgage by £138 to £887, based on a new rate of 5%.

People who are heavily mortgaged with a £250,000 loan would see their repayments drop by £230 a month, or £2,757 a year.

Homeowners with fixed rate mortgages, who account for around half of all secured borrowers, will not see a change to their repayments, as their mortgage rate is fixed for the term of the deal.

Yesterday Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, said it was reducing its SVR rate by 1.5% to 5% from December 1.

It was later joined by Abbey, which is also passing on the full 1.5% reduction to SVR customers.

Also yesterday, the European Central Bank (ECB) announced a 0.5% rate cut.

Last night the Bank of Ireland confirmed it will pass on that cut in full to its customers.

The unexpectedly large cut, the biggest since Margaret Thatcher’s government sliced 2% off rates in March 1981, brings the cost of borrowing to 3%, its lowest level since 1955.

The Monetary Policy Committee said yesterday that there was a “substantial risk” of undershooting its 2% inflation target as recession looms.

Interest rates were previously held at 5% for six months by the MPC due to inflation fears, but with oil prices at less than half their July record recession concerns are taking centre stage.

It came as the International Monetary Fund warned 2009 would be the first year of shrinking activity for the world’s advanced economies since the Second World War.

The cut, which came against a backdrop of rising unemployment, falling house prices and the biggest fall in new car sales for 18 years, was welcomed across the board.

Business leaders were united in demands for the reduction to be passed to businesses and domestic borrowers.

Martyn Pellew, North East Chamber of Commerce vice-president, said: “We need to restore confidence to the banking sector, the business community and to the public to get money moving around the system.

“This significant cut should serve as a catalyst to boost confidence and help us ensure a faster recovery. We hope that banks will pass on these cuts to businesses and consumers without delay.”

And he said that the reduction would secure the future of a number of projects in the region: “The North East has many exciting large-scale investment projects in the pipeline, in particular in the processing and ports sector and this cut will help ensure that these come to fruition.”

Liz Mayes, assistant regional director of the CBI North East, said: “Recession has replaced inflation as the major threat to the economy over the next year or two. This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers.”

Federation of Small Businesses chairman John Wright said: “The cut amounts to a generous saving for small firms of £750m on loans and overdrafts. But all this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit.”