Banks fail to pass rate cuts to borrowers By Daniel Pimlott, Economics Reporter
Financial Times Published: January 12 2009 12:41
Banks failed to pass on record cuts in interest rates last month to mortgage borrowers, but slashed interest due to savers, according to figures published on Monday by the Bank of England.
While the Bank cut interest rates by a full percentage point in early December in response to the escalating credit crisis of the autumn, the rates paid by most mortgage borrowers were lowered only by a fraction of that.
Savers, on the other hand, saw interest on their deposits cut by more than the reduction in the Bank rate.
Interest rates on two-year fixed rate mortgages for homes purchased with a deposit of 25 per cent, which is the most common form of borrowing, fell to 4.79 per cent from 5.1 per cent in November, the Bank of England?s survey of quoted rates showed.
Although that is the lowest level since April 2006, it is still much higher than in the Bank rate, currently 1.5 per cent.
The rate cut was passed on more fully to those with tracker mortgages, which on average fell to 4.95 per cent from 5.78 per cent, the lowest level since January 2004.
Michael Saunders, an economist at Citigroup said: ?While policy rates head towards zero, the rates that most households face are not heading down? so far.
Quoted rates for fixed-rate mortgages with a 25 per cent deposit and a longer term have also not fallen much. Three-year fixed mortgages were cut from 5.46 to 5.15 per cent and for five year mortgages from 5.47 to 5.31 per cent.
At the same time savers were hit hard by cuts in the interest paid on their deposits.
Interest paid on instant access accounts fell from an average of 1.68 per cent to 0.81 per cent, while that paid on fixed-rate bond deposits ? which often require savers to keep their money in saving for at least a year ? fell by marginally more than 1 percentage point to 3.01 per cent.
Interest rates for ISAs were cut by 1.7 percentage points, and on savings with a specified time length of deposit by 1.5 percentage points.
The refusal of banks to lower rates comes in spite of their £37bn recapitalisation using public money, and demands from the government that they lend more. Banks are also unable to pass on rate cuts because their costs of funding remain elevated.
Gross mortgage lending fell by more than half in the 12 months to November of last year, recent data from the Council of Mortgage Lenders showed.
?Banks don?t particularly want to increase lending because of the risk of rising debt defaults as the economy goes deeper into recession,? said Vicky Redwood of Capital Economics.
The smaller reduction in the interest rates charged on mortgages than in those paid to savers is allowing banks to ?increase profit margins and boost capital?, Ms Redwood added.