Rate Cut Still Taking Effect
18 November 2008
The Bank of England's dramatic 1.5 per cent slashing of interest rates a fortnight ago is still percolating through to the general public, after the nation's lenders played catch-up with events. Last week saw frenetic activity in the mortgage markets, with numerous tracker mortgages removed from the market before being reintroduced at higher rates.
The good news for struggling homeowners is that most major lenders have adjusted their variable rates on existing policies accordingly. The bad news is that banks tend to quote their rates based on the London Intra-Bank Operating Rate, or LIBOR, which tracks the Bank of England base rate but is generally a couple of percentage points higher and doesn't automatically follow the same trends. Recent economic shocks have made banks far less willing to lend to one another, hence the LIBOR rate has been historically high compared to base rate. This also explains why fixed-rate mortgage offers haven't dropped by two per cent in the period since October, when the UK's headline interest rate has done precisely that.
As of last Thursday, lenders who had passed on the 1.5 per cent cut in established variable rate mortgages included HBOS, Abbey, RBS, Nationwide, Lloyds TSB and the nationalised Northern Rock. However, some lenders were still refusing to budge by this point, with Barclays, HSBC and Alliance & Leicester all describing their rates as "under review" and refusing to give any indication of when (or, indeed, if) cuts will come. Fearful of the latter prospect, whereby some banks simply don't allow their customers to benefit from the BoE's bold move, the Chancellor Alistair Darling has been applying strong pressure to the heads of recalcitrant banks, hoping to force them to allow the nation's indebted mortgagees to benefit from lower mortgage repayments. Cutting the BoE base rate will achieve nothing if lenders do not pass savings on to borrowers, and Parliamentary intervention is being threatened for any lenders who continue, in the words of Treasury select committee chairman John McFall, to "defy the laws of arithmetic by not passing on rate cuts."
Many analysts are now turning their attention to the Pre-Budget Report, which comes out next Monday. It is expected that the drop in interest rates will be accompanied by reductions in some taxes, as well as possible increases in public spending.