Brown tells the lenders to cut mortgage rates

BANKS were under growing pressure last night to pass on dramatic savings to borrowers after the Bank of England slashed interest rates by 1.5 percentage points.

Only Lloyds TSB confirmed it would adjust mortgage rates immediately, despite demands from consumer groups and politicians, including Gordon Brown, the Prime Minister, for others to act. The government was keen that its views be heeded by the banks, as part of the £500 billion Treasury bail-out of the sector.

The announcement by the Bank's monetary policy committee (MPC) – which brought interest rates to a half-century low of 3 per cent – shocked and delighted commentators, who had been hoping for a one-point cut to try to stave off a prolonged recession. It means there has been a reduction of two full points in less than a month and analysts believe it could lead to a 1.5 per cent rate some time next year.

The European Central Bank also cut its rate yesterday, by half a percentage point to 3.25 per cent, and signalled another reduction was possible this year.

The moves came amid depressing international and domestic data. The International Monetary Fund predicted the world would slide into recession next year, the Halifax reported yet another UK house-price slump – of 15 per cent in the past year, an average fall of £30,000 – and it emerged sales of new cars had hit a new low.

In the wake of previous interest rate cuts, the government called on banks to pass on the savings to borrowers. This time, Westminster has further leverage because of its rescue agreement with some of the banks. The scheme means that HBOS, Lloyds TSB, Royal Bank of Scotland and five others that have signed up for government funds must keep their lending rates "competitive".

The Treasury said yesterday this was not meant to be a "scientific" term, but "it would not be competitive if you left (the rates] as they are". A spokesman said it was "not about forcing the banks" but "if interest rates were to change, (banks] would be expected to respond instead of doing nothing".

He added: "The way we hold them to act is we will hold preference and ordinary shares and, potentially, will have several directors on their boards."

Yvette Cooper, the Treasury Secretary, said UK Financial Investments Ltd – the new holding company set up by Alistair Darling, the Chancellor, to manage the taxpayers' share in the banks – would also make sure the agreement conditions were met. Mr Darling said: "I think it's essential that the banks do pass on the benefit of lower interest rates to people and to businesses."

But the British Bankers Association warned consumers might not immediately see a benefit because the rate at which the banks lend to one another, the Libor, would have to change first.

And the Council of Mortgage Lenders said: "The real cost of funds to lenders is determined not by the Bank base rate, but by their own cost of borrowing.

"So it does not make commercial sense to insist or expect that lenders automatically 'pass on' cuts in the Bank rate to borrowers – other than those with Bank-rate tracker mortgages – unless and until the cut flows through to an equivalent reduction in their own funding costs."

If mortgage lenders did pass on the 1.5-point cut in full, it would slash the monthly cost of a typical £150,000 mortgage by £138 to £887, based on a new rate of 6 per cent.

Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, said it was passing on the full cut to its variable-rate mortgage customers. But others were slower to respond, with all the main groups, including the UK's biggest lender, Halifax, saying only that their rates were under review.

Jonathan Fair, chief executive of the industry group Homes for Scotland, said: "Lenders must be persuaded to pass this substantial reduction on at the earliest opportunity.

"Homebuyers, and the housing industry, can take heart from today's announcement, the latest in a series of positive measures aimed at bringing stability back into the economy."

Announcing news of the rate cut to MPs, Harriet Harman, the Leader of the Commons, said there would be a "strong expectation" that it would be passed on to those who have mortgages and who run small businesses.

She said a government minister was meeting chief executives of banks and building societies and would make it "very, very clear" that the interest rate cut should be passed on to borrowers.

Ms Harman said: "The government has put in a considerable amount of public money – both directly £37 billion by way of capitalisation of banks, and through guarantees a further £250 billion – and we expect there to be some response from banks and building societies… (to] make sure that the interest rate cut is passed on, not only to mortgage holders but also to small businesses."

Vince Cable, the Liberal Democrat Treasury spokesman, said: "The government-appointed directors of these semi-nationalised banks will now have to ensure that they continue to supply credit and pass on interest rate cuts."

The Bank said it had cut the rate so drastically because of the "substantial risk" of undershooting its 2 per cent inflation target as a sharp recession looms.

Business leaders and unions immediately, and warmly, welcomed the move, with "bold" being the favoured adjective. It is the biggest single cut since a two-point drop in March 1981 – when the country was gripped by recession in the early years of Margaret Thatcher's government – and brings rates to their lowest level since early 1955.

However, it did nothing to calm the turbulent markets, with the FTSE 100 ending 6 per cent down, wiping more than £62 billion off the value of Britain's top companies and surrendering a large slice of gains seen in previous sessions.

David Kern, an adviser to the British Chambers of Commerce, said the MPC should move much more "steadily and deliberately". "Emergency measures have the undesirable affect of unsettling the markets," he warned. "Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens."

Analysts expect more aggressive cuts to come. Howard Archer, of Global Insight, said it was possible rates could fall to 1.5 per cent by mid-2009.


FACT BOX

SAVERS, already seeing the real value of their money eroded by inflation, will take a further hit from the rate cut. Current best buy deals of more than 6.5 per cent on savings accounts and 7 per cent on bonds are likely to be short lived. Moneyfacts.co.uk said yesterday it had seen an "influx" of savings providers pulling their fixed rate bonds following the MPC announcement.

Michelle Slade of the firm said: "We expect people to cut rates, but a lot should stave off cutting them by the full 1.5 per cent as they still want the custom because they are struggling to get funding for mortgages."


The last times rates were so low …

May, 1954: Roger Bannister, a 25-year-old British medical student, becomes the first man to run a mile in less than four minutes.

July, 1954: Fourteen years of food rationing in Britain is ended when restrictions on the sale and purchase of meat and bacon are lifted.

September, 1954: The National Trust for Scotland takes control of Fair Isle, situated between Shetland and Orkney, famous for its bird life and knitted sweaters.

November, 1954: Winston Churchill celebrates his 80th birthday.

December, 1954: Rock and roll becomes a valid genre as the first single hits the British charts, in the form of Bill Haley and his Comets' Shake, Rattle, and Roll.

January, 1955: Britain is hit by freezing temperatures that brings parts of the country to a halt, as snow blocks more than 70 roads, forcing the RAF to drop food and medical supplies to affected areas.

January, 1955: Fourteen people are killed and dozens injured when an express train travelling from York to Bristol derails and overturns at Sutton Coldfield station.


Analysis: 'With only 47 shopping days left to Christmas, key issue is whether move will fill Britain's shoppers with Yuletide cheer'

DAVID BELL

EXTRAORDINARY times call for extraordinary actions. Yesterday, the Bank of England's Monetary Policy Committee finally got the message. It made its boldest move since it was set up, cutting the base rate by 1.5 per cent.

This was the deepest cut since 1981, when the UK was similarly poised on the edge of recession. The size of yesterday's cut wrong-footed City analysts, accustomed to a gradualist approach from a cautious MPC. Such a dramatic change in sentiment has rarely been witnessed since Paul visited Damascus. Two months ago, only one member of the committee, David Blanchflower of Stirling University, voted for a cut. Last month there was unanimity among all nine members on a cut of 0.5 per cent. Yesterday, they agreed to reduce base rate to 3 per cent, its lowest for 50 years.

Three developments have changed the collective mind of the MPC. First, it now realises that the Bank's forecasting models, which had predicted modest growth during 2008 and 2009, are incapable of dealing with monetary shocks, such as the tightening of credit conditions following the collapse of the US subprime market. Second, a flurry of adverse indicators suggests that the health of the British economy has changed rapidly from seeming robust health to being in need of intensive care.

Reports from construction, manufacturing, transport, financial services, retail and other services all suggest output is contracting. Following their near collapse, the deleveraging of major banks is strangling the supply of credit to consumers, housebuyers and businesses.

Third, the threat of inflation driven by higher oil, energy, commodity and food prices has vanished as rapidly as the proverbial snow off a dyke as prices have fallen.

As the economy is in largely uncharted territory, the Bank does not know what effect this latest move will have. Its move must reflect an expectation that, next year, inflation could be so far below its 2 per cent target that the Governor will again have to write an apologetic letter to the Chancellor – only this time to explain why it is below target.

Its fervent hope that credit conditions will ease depends on the extent to which rate cuts are passed on. Even if not fully reflected in the rates banks charge, the cut will almost certainly reduce the cost of borrowing. Relative recent calm in the markets helped edge the critical Libor rate down, even before yesterday's cut.

Hopefully, further easing will also lead to a rise in the supply of credit. Savers will lose – though with inflation coming down rapidly, the real value of their assets will be maintained. Over the next few weeks, there will be more bad news. But attention will gradually switch to the high street as Christmas approaches. With only 47 shopping days left, the key issue will be whether yesterday's cut will restore enough confidence to fill Britain's shoppers with Yuletide cheer, offsetting the gloom hanging over the economy.

• David Bell is professor of economics, Stirling University.


Number of Scots going bankrupt could hit 20,000 by end of year

JEFF SALWAY

RECORD numbers of Scots are going bust, according to figures released today .

There were 5,998 personal insolvencies in Scotland in the three months to the end of September, a 26.7 per cent hike on the previous quarter and 70.1 per cent more than in the same period last year.

A total of 14,008 Scots were made bankrupt in the first three-quarters of this year, more than in the whole of 2007, said accountants and business advisers PKF, who analysed the new government insolvency figures.

If the current rate of increase continues, the number of Scots made bankrupt in 2008 could reach 20,000. In 1998, just 4,465 Scots were made bankrupt.

The last three months have seen a similar increase in the number of Scottish companies going bust. There was 30 per cent hike to 289 in the number of Scots companies going into liquidation or receivership in the third quarter, said PKF, a 43 per cent increase on the corresponding quarter last year.

Among the Scots firms to have gone to the wall since July are the Edinburgh-based housebuilder Gregor Shore and the coffee house chain Beanscene.

The personal insolvency figures include both protected trust deeds (effectively voluntary bankruptcies) and sequestration, the Scottish term for formal bankruptcy.

The rise is partly due to a rule change introduced in April this year that makes it easier for those on low incomes to declare themselves bankrupt.

But easy availability of credit in recent years remains the chief reason for the rise in insolvencies, said Anne Buchanan, corporate recovery partner with PKF.

She said: "At the root of all of this personal insolvency is many years of unrestrained credit, resulting in thousands of individuals extending themselves beyond the possibility of repayment and ultimately resulting in their bankruptcy."

Yesterday's interest rate cut to 3 per cent was too late for those already struggling with debt, she added. "The drop in interest rates will take some months to filter through and benefit individuals, and there will be many people teetering on the brink of insolvency."


Crunch in brief

Steel giant Corus to cut 400 jobs

THE economic downturn yesterday claimed more jobs as steel giant Corus announced plans to cut 400 posts from its distribution business.

The proposed cuts will be spread across the UK, including 100 in the West Midlands, almost 150 in Wales and 50 in Leeds.

Meanwhile, historic china manufacturer Royal Worcester & Spode Ltd last night announced it had gone into administration.

The Midlands-based firm, that dates back to 1751, employs 388 people.

Car sales crashto 17-year low

NEW car sales in October suffered their biggest monthly year-on-year fall for more than 17 years. Motor industry leaders predicted that annual sales in 2009 would dip below the two million mark for the first time since 1995.

The number of new UK registrations in October 2008 totalled 128,352 – a 23 per cent drop on the October 2007 figure, the Society of Motor Manufacturers and Traders announced. The decline was the steepest since June 1991.

Jitters set to hit the art market

SERIOUS jitters took hold in the international art market yesterday as auction houses struggled to find buyers for works from Manet and Renoir to Rothko. Two private art collections, owned by the Hillman and Lawrence families in New York, were expected to fetch more than $100 million (£63 million).

But the total sale at Christie's in Manhattan was less than half that, with 17 out of 58 works failing to sell and others bringing much lower prices than predicted.