Industry experts say the Bank of England's historic interest rate cut will be pointless if savings are not passed on to ordinary borrowers.
Earlier today, the Monetary Policy Committee (MPCs) cut rates by 1.5%, the largest single rate cut since 1981, but some analysts are worried the move will have little effect if lenders fail to cooperate.
The Council of Mortgage Lenders (CML) and the British Bankers’ Association (BBA) have already issued statements saying it is unlikely their members will pass on the full savings of the rate cut.
Speaking after the MPC’s announcement, estate agent Peter Rollings says: “The MPC has mercifully realised the crucial importance of cutting rates, but it’s not going to make any difference to the housing market at all if the banks don’t pass this cut onto borrowers.”
He says a number of banks have withdrawn their tracker rates to increase prices and compensate for the base rate cut and says lenders are simply covering their own backs.
Ross Bowen, managing director of Connells Survey & Valuation, says passing on the rate cut is vital to achieving the Bank of England’s goal of staving off a recession.
“It’s now crucial that lenders pass this unprecedented 1.5% rate cut onto borrowers,” he says.
“Consumers must see the benefit of looser monetary policy if we’re to avoid the worst ravages of recession. The government and authorities cannot relax now - the health of our whole economy depends on it.”
However, mortgage lenders have become increasingly concerned about the risks of mortgage lending, and many have increased their margins to compensate for falling house prices and increasing arrears and possessions.
Groups representing banks, building societies and other lenders say most borrowers will not see a major reduction in their monthly mortgage payments as a result of today’s decision.
“This reduction in the Bank Rate will provide some support to the housing market and especially borrowers on tracker rates. However, borrowers looking for new fixed rate deals or homeowners with mortgages linked to money market rates will not necessarily find their mortgage rates decreasing,” warns Adrian Coles, director general of the Building Societies Association (BSA).
The BBA was also keen to point out that the Bank of England’s base rate is lower than the rate that it lends money to other banks.
Banks also need to consider the effects of an economic downturn and lend responsibly to protect their businesses, the BBA adds.
Julian Chillingworth, chief investment officer at Rathbones Unit Trust Management, says the real test of the Bank of England lies in whether this drastic move gives some benefits to the real economy, but says it is too early to say what the true effect will be.
There is a sense that the Bank has been behind the curve, in which case is this a gesture too late? The key, of course, is whether this move filters into the real economy,” he says.
So far, just one lender, Lloyds TSB and its Cheltenham & Gloucester subsidiary, has promised to pass on the full base rate cut to its variable rate customers.
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