Banks spurn pleas to cut rates by raising cost of mortgages

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The Independent Online

Mortgage lenders are ignoring pleas from the Government and consumer groups to honour the terms of recent emergency bailouts and pass on this week's expected Bank of England base rate cut – instead pre-empting the decision by increasing rates for new customers.

Despite a substantial base rate cut on the cards, Abbey has increased the rates on its tracker products by up to 0.5 percentage points. Nationwide has increased its tracker rates by up to 0.4 percentage points, Halifax has withdrawn its two- and three-year trackers and increased its five-year tracker by 0.5 percentage points, and Northern Rock has increased its two-year tracker by 0.15 percentage points. Meanwhile, HSBC has said that there would be some "stickiness" in passing on any cut.

A group of MPs is organising a motion in Parliament urging all UK banks to pass the benefits on to cash-strapped consumers, at the same time as urging the Monetary Policy Committee to significantly cut the base rate.

The Business Secretary, Lord Mandelson, told the BBC's Today programme yesterday: "When official rates are being cut, it is not unreasonable for customers to see some benefit from that. When the Government bailed out some high street banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, by taking a £37bn stake in them, one of its conditions had been for these institutions to restore credit lines. If it appeared that the banks were standing in the way between what the Government is doing and how the public wants to benefit, then many banking customers are going to be asking some difficult questions of the banks."

But the days when a base rate cut almost guaranteed the same saving for homeowners seem long gone. Last month, only 24 of the UK's 88 lenders passed on the full half-point cut in the base rate, just 27 per cent of the market; 33 only managed a partial rate cut, and the remaining 31 lenders failed to make any cuts at all.

Doug Taylor, personal finance campaign manager for the consumer watchdog Which?, said lenders appear to be unreasonably exploiting their position: "Consumers will look aghast at lenders who, faced with a cut in base rate, actually increase their lending rates. It is hard to believe that the sector could devalue its reputation any more but it seems to have found a way to do that."

The failure of lenders to follow the lead likely to be shown by the Bank's Monetary Policy Committee tomorrow is all the more surprising given the easing in interbank borrowing rates. The key three-month sterling Libor has declined to below 6 per cent over the past month, while the overnight rate dropped slightly yesterday. Observers expect more reductions to come, as central banks around the world aggressively cut rates.

The fall in sterling and euro rates, however, has been much less marked than the fall in the cost of borrowing dollars. The dollar three-month Libor is at its lowest in five months, at 2.70625 per cent, the 17th consecutive daily decline.

The clamour for a cut in rates from the Bank of England tomorrow has reached a new pitch. The normally cautious CBI has called for a one percentage point reduction. John Cridland, the CBI's deputy director-general, said: "The recession into 2009 will be both longer and deeper than expected, and we need the strong medicine of a full percentage point cut."

The British Chambers of Commerce is urging a smaller initial cut of half a percentage point on Thursday to 4 per cent, with a further half-point cut to 3.5 per cent by Christmas.

These and similar demands were reinforced by another set of weak economic data. October's Report on Jobs, from the Recruitment and Employment Confederation and KPMG, showed that permanent and temporary staff appointments fell at survey-record rates. Wages and salaries declined for the first time in over five years.

Mike Stevens, a partner at KPMG, commented that "many employers won't have any choice than making large-scale redundancies".

No surprise, then, that consumer confidence, as measured by the Nationwide index, remains at thoroughly depressed levels. Although overall confidence readings rose for the first time since September, people are more worried about losing their jobs. Some 41 per cent of consumers think there are few jobs available now, up from 35 per cent last month: over half (56 per cent) think there will be few jobs available in six months, up from 48 per cent in September.

The dire state of the construction industry was also stressed by a new survey of purchasing managers in the sector by the Chartered Institute for Purchasing and Supply (CIPS). Roy Ayliffe, director of professional practice at the CIPS, said: "Concerned purchasing managers reported a new survey low in activity levels under the relentless onslaught of tightening credit conditions, plummeting confidence and high inflation. Firms axed staff at the survey's fastest recorded rate. With no recovery in sight, constructors gave their first ever pessimistic prognosis on future sector performance in the eleven-and-a-half-year history of the survey."

Such a gloomy backdrop may well impel the MPC to cut rates by even more than expected tomorrow. Howard Archer, economist at Global Insight, added: "We believe there is a very strong case for the MPC to slash interest rates from 4.50 per cent to 3.50 per cent on Thursday. Further out, we expect interest rates to come down to 2 per cent by mid-2009, and it is very possible that they could fall even further thereafter."

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