Banks that pocket rate cuts face tougher action

Gordon Brown urged the banks to pass on the full benefit of yesterday's surprise 1.5 per cent cut in interest rates to mortgage-holders and small businesses. His call came as Labour MPs called for legislation to force banks to lower their mortgage rates in line with rate reductions by the Bank of England to ensure that the impact of the downturn is softened and people who need it most get help.

Ministers stopped short of threatening legislation but hinted at other action to force banks who drag their feet into line. Yvette Cooper, the Treasury Chief Secretary, said the banks that shared a £37bn injection of taxpayers' money – Royal Bank of Scotland, Lloyds TSB and HBOS – had signed up to conditions, including continuing to lend at competitive rates.

She suggested that the Treasury was looking at strengthening the monitoring of those other banks which did not take government money.

However, the Chancellor, Alistair Darling, admitted yesterday thatt there were limits to what the Government could do. "I believe that it is imperative that banks realise they have got to play their part in helping businesses and helping people," he said: "Banks have to decide on an individual case, the terms and conditions on which they lend. That's what people expect, government can't decide that."

Labour MPs are worried that the Government will suffer a backlash from the voters unless they feel the benefit from yesterday's cut in rates to 3.5 per cent. MPs say many people are already uneasy about the bailout for the banks and that ministers will look impotent if the rate reduction is not passed on.

George Mudie, a Labour member of the Commons Treasury Committee, accused the banks yesterday of "total arrogance". He added: "If the banks who are getting all this help and the rate cut is not passed on, there would be such anger that the Government would be forced to do something and would get whatever it wanted through the House of Commons fairly easily."

John McFall, the committee's chairman, said: "The Government has a big stake in the banks now. It is important that it really tells the chief executives and chairmen that they are seen to be responding to the public good. The handout can't be all one way."

Thirty-four MPs signed a Commons motion yesterday calling on all banks and building societies "to pass on all future benefits to help ordinary people cope with the current financial situation".

Mr Brown's official spokesman said it was "critical" that the impact of yesterday's Bank of England decision was passed on so that the full effects could be felt. Asked whether that meant the full 1.5 per cent reduction, he said: "The Prime Minister supports the view that the banks should pass on these cuts. I think the public expects that when there is an interest rate reduction of this magnitude, that they should see the benefit of that."

Vince Cable, the Treasury spokesman for the Liberal Democrats, urged ministers to "get tougher" with the banks yesterday. "I quite understand the Government doesn't want to get into every individual lending decision of the banks," he said. But he said 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".

George Osborne, the shadow Chancellor, said the rate cut would be passed on only if the financial system was working properly. "It's got to be the financial system in the end that feeds through. The transmission system has to work," he said.

Mr Osborne added: "The cut is an indication of how serious they think the economic crisis is. It's confirmation we are in a very, very deep economic hole and Britain is ill-prepared for the events that are about to unfold in our economy."