In the immediate aftermath of cuts in the Bank of Englands base rate, banks appeared as reluctant as ever to pass the entire reduction to their mortgage and commercial customers. Only two banks, immediately cut their rates. All the others dug their heels in. The banks insist that credit remains both tight and expensive and they need to rebuild profits and balance sheets.
In great annoyance, the Government ordered Directors from the banks to come to Downing Street for a very public dressing down. This was an almost theatrical event by all accounts. The Chancellor arrived with a huge file of press cuttings, all of them expressing the publics outrage at the bankers' shameful performance. Look, the Chancellor said, we've bailied you out. Now it's time to perform.
A few hours later, the banks had all moved into line. Is this evidence of the new world order we ask ourselves. Is this at last proof that banks that have taken public money can also be controlled? Could it be true that when the Government shouts "jump", they all spring up? After years of obdurately refusing to do the Government's bidding, it appears the tide has turned.
Yet though the Chancellor seems on the surface of things to have scored a victory, the theatricals at Number 11 Downing Street were in truth had little practical importance. More than 50 per cent of the mortgage market is now on fixed-rate deals, so the costs of these are totally unaffected by rate cuts. Then 30 per cent of mortgage holders are on tracker mortgages and they automatically get the full benefit of rate cuts, as that is the essence of how trackers work.
That leaves just 20 per cent of the mortgage market directly affected by the banks belated agreement to reduce interest costs. These are the homeowners whose mortgages on on either standard variable rates (SVR) or have discounted mortgage deals. Some years ago the SVR mortgages used to dominate the market but these days SVRs are largely limited to those who have just come off a deal and are waiting to move to a new one, or those with very small mortgages where it is not worthwhile paying the fee to move to a new deal. Therefore, the benefit to ordinary mortgage-holders of the banks agreement to toe the line, is unlikely to be significant.
What the banks actually promised was to cut their SVRs for existing customers by the full reduction in base rate. But there was no commitment for reductions on the pricing of new mortgages. The British public has got used to the idea that mortgage interest rates are priced off base rates. But they are wrong. In practice, this has not been the case for a long time and in the future, it is likely to be even less true.
Thanks to the banking crisis, the problem is that the low interest rate environment that the government wants to bring about, does not yet apply in the wholesale markets. And it is the wholesale markets, where money continues to be priced much more expensively. Lenders are being asked to price according to the Bank of Englands base rate, yet it is not base rate but Libor that determines the cost of their funding - Libor being the rate at which banks lend to each other.
During the months prior to the banking crisis, the average difference between three-month Libor and base rate was just 0.16 per cent, in other words 16 basis points. But now it can be as high as 1.49 perc cent. At the last reduction in base rate, Libor fell substantially but not by as much as the reduction in base rate. In other words, the spread actually widened. In the final analysis, despite the lower base rate, it remains expensive for building societies and banks to borrow on the wholesale market.
![[Valid RSS feed]](http://www.freebie-articles.com/images/rss.gif "XML Feed For RSS")
Category Rss Feed
Print This Article
Add To Favorites