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Banks were accused of profiteering after failing to pass on the historic 1.5 per cent interest rate cut. Within hours of the Bank of England cutting its base rate, lending giants axed their best mortgage offers.
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Banks were accused of profiteering after failing to pass on the historic 1.5 per cent interest rate cut. Within hours of the Bank of England cutting its base rate, lending giants axed their best mortgage offers.
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Banks under pressure to cut rates
Banks are under government pressure to cut their mortgage rates following Thursday's shock cut from the Bank of England.
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Bank's great rate gamble
Ministers and opposition politicians piled moral and political pressure on banks to pass on yesterday's stunning 1.5% cut in interest rates to borrowers, as fears over the deepening recession prompted drastic action to stimulate the economy.
The Bank of England move, the biggest cut it has ever made, took borrowing costs down to just 3%, the lowest level since 1954.
Together with last month's half-point rate cut, this should put nearly £1bn into the pockets of shoppers in the run-up to a Christmas which retailers have warned could be the worst for 30 years.
But there was no guarantee that the High Street banks would pass on the reduction, which would be worth around £130 a month to a homeowner with a typical £150,000 variable rate or tracker mortgage.
But last night LloydsTSB, which is seeking billions of pounds of taxpayers' money to aid its takeover of HBOS, was the only bank to have confirmed that it would pass on the cut to people with variable rate mortgages.
Anticipating a substantial rate cut, banks have already withdrawn many of their attractive tracker deals in the last 48 hours.
Chancellor Alistair Darling welcomed the Bank of England's decision. Though he has no power to force banks to hand on the cut, he said: "I believe that it is imperative that banks realise they have got to play their part in helping businesses and helping people, and one of the key ways they can do that is by passing those interest rate cuts through."
HSBC, Nationwide, Barclays and Royal Bank of Scotland said they were reviewing the situation regarding their standard variable rates. There was no immediate comment from HBoS, the country's biggest mortgage lender, but together with RBS, it will be under huge pressure to pass on the full effect of the rate cut following the government bail-out only three weeks ago.
With 40% of mortgage holders on tracker rates and 10% on standard variable, over four million households will benefit from the rate cut. However, the 50% of households on fixed rates will not see any gain.
John McFall, the treasury select committee chairman, urged the chancellor to put pressure on the banks saying: "Having got themselves into this mess it was the taxpayers that bailed them out. That's the issue here." He expected further cuts down to 2% interest rates eventually.
Vince Cable, the Liberal Democrat treasury spokesman said the government needed to get tougher with the banks who he accused of treating the government with contempt. He added that banks "are not observing the spirit or the letter of the undertakings to the government and the government is going to have get tougher with them".
The monetary policy committee's dramatic move shocked everyone yesterday - the City was expecting a cut of a half or one percentage point. The sheer scale of the cut was sufficient to boost the stock market and the pound. But both later fell back again with the FTSE 100 finishing nearly 6% down on the day at 4,272, its eighth biggest percentage fall wiping £63bn off the value of leading shares.
The extent of the economic downturn was underlined yesterday by figures from the Halifax showing house prices tumbling 15% from a year ago - the biggest fall for 25 years - car sales in October dropping 23% and construction projects slumping by a fifth.
Threadneedle Street has never moved rates by more than half a point in either direction since being handed responsibility for them by the incoming Labour government in 1997. Before yesterday there had not been a bigger cut since early 1981 apart from the wild gyrations in rates on Black Wednesday in 1992 when Britain was forced out of the European exchange rate mechanism.
The Bank had come under tremendous pressure this week from the City, industry and trades unions to make a big rate cut but only the TUC had called for one as big as 1.5%.
TUC chief economist Adam Lent said: "This is the right call. It shows the Bank now understands that the problem is recession not inflation. "But the real challenge is to ensure that these cuts are passed on to both business and mortgage customers. Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving again.
The Bank was not alone in cutting rates yesterday - the European Central Bank reduced borrowing costs by half a point to 3.25% along with cuts by the Swiss and Czech authorities.
Darling said that the government had ensured that those banks it has part-nationalised would pass the cut in interest rates on.
"In relation to RBS and to HBOS and to Lloyds, if they merge, we're taking shares in those banks and we have agreements with them to make substantial amounts available," he said.
Treasury chief secretary Yvette Cooper hinted the government did have the means to press the banks saying: "We are setting up a new arrangement to monitor the banks, and the way they lend. I don't think it's appropriate for government to take decisions about individual products, but we are making clear that all banks should do their bit. There is an important issue for banks to recognise their obligations to the rest of the economy."
Shadow Chancellor, George Osborne said:"This is a shot in the arm for the economy, but it shows how sick the patient is."
Roger Bootle, head of Capital Economics, said the rate cut was the beginning rather than the end of a substantial monetary easing. "The UK is set to endure a recession that will be deeper and longer than the one seen in the early 1990s. With deflation also threatening, the MPC needs to keep cutting interest rates aggressively.
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British Bankers' Association statement on rate cut
Angela Knight said%26#58; The banking industry is pleased the Bank of England has cut interest rates.
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