Cost of overdraft at highest level for a decade despite base rate low

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The cost of an overdraft at Britain's banks is now higher than at any time for a decade, research shows, despite the fact that the Bank of England base rate has now been at an historic low of just 0.5 per cent for 14 consecutive months.

Moneyfacts, the personal finance data provider, said the average interest rate charged on an authorised overdraft in Britain was now 14.22 per cent, more than at any time since May 2000. The last time overdraft rates strayed above 14 per cent, the base rate was at 6 per cent, 12 times higher than the current level.

Michelle Slade of Moneyfacts said the climbing cost of agreed overdrafts reflected banks' loss of income from other sources. In particular, the cost of unauthorised borrowing has fallen dramatically since millions of customers launched claims for compensation for unfairly high penalty charges, even though the banks eventually defeated a legal challenge to their right to levy such fees.

"The loss of income gained from a minority of customers is now being recouped from all customers who use an agreed overdraft," Ms Slade said. "Banks are likely to be making more now from these increases than they ever were from penalty charges."

The figures are likely to increase the pressure on the banks to do more to enable personal and business customers to get access to affordable credit. Vince Cable, the new Business Secretary, who was given responsibility for banking policy yesterday, has made it clear that encouraging the banks to lend more will be a clear priority for his department.

However, a spokesman for the British Bankers' Association said Moneyfacts' comparison with historic rates was unfair, because in 2000 Britain had been in an "easy credit era".

He added: "The economics of the industry have changed; to point out one factor as the main influence on pricing makes no sense."