UK banks pressed to pass on interest rate cut

Prime Minister Gordon Brown and Mervyn King, Governor of the Bank of England, are adding to the pressure on banks refusing to cut interest rates for borrowers.

With the base rate reduced by 1.5% to a 50-year low of 3%, it was hoped that homeowners and businesses would benefit from a large cut in interest rates. However, some financial institutions are refusing to cut rates.

In an effort to pressure them to reduce rates, ministers met with officials from some of the biggest lenders, including Barclays and Lloyds TSB.

Matthew Sharratt, a London-based economist for the Bank of America said: “The size of the cut is so glaringly large, they’ll just have to make some effort to pass along some of it.

“For banks to say they’re not in a position to pass any of the cut on would increase the political heat so much they potentially don’t want to go there.”

Conditions attached to the £50 billion rescue plan given to banks last month stated that lending should return to 2007 levels. However, mortgage approvals are close to a record low.

At a press conference, Gordon Brown said: “We are determined that lending resumes. We’ve given liquidity to the banks, we’ve now recapitalised the banks. It’s now up to the banks.”

Some banks have begun cutting the standard variable interest rates charged to customers, although HSBC and Barclays have made no change. Abbey National, Lloyds TSB, HBOS and RBS all said they will match the central bank’s interest rate cut.

While borrowers would benefit from the fall in interest rates, the British Banks Association claimed savers would be unhappy.

Angela Knight, chief executive of the BBA, said: “Banks are committed to doing their part to help rebuild the UK economy as well as ensuring we help and support our customers, both lenders and savers.”

There were some signs that the dramatic cut in interest rates has led to a small recovery in the housing market. Traffic on the Rightmove website, which displays more than 90% of homes for sale in the UK, jumped by 20% after the announcement.

Miles Shipside, commercial director of Rightmove, said: “Buyer affordability and the start of recovery in the housing market is now in the hands of lenders.”

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