Rate lowest since 1951 but fear grows

THE Chancellor last night warned banks of "further action" if they failed to boost lending following yesterday's 1 percentage point cut in interest rates to their lowest level since 1951.

Alistair Darling told Edinburgh Chamber of Commerce that Britain would get through the economic turmoil and would emerge in better shape after the Bank of England cut its base rate to just 2 per cent. Some banks passed on the cut to customers on tracker-rate mortgages.

However, there was anger that hundreds of thousands of other mortgage holders on standard variable rate (SVR) policies will not have the full savings passed on to them. The Halifax – Britain's biggest mortgage lender – said it would only trim its standard variable rate by 0.25 percentage points.

The Halifax and Bank of Scotland mortgage rates are calculated separately and last night BoS announced its SVR would reduce on 1 January from 5.35 to 4.84 per cent. Nationwide, meanwhile, announced a cut of only 0.69 points in its standard rate.

Many banks had not said what they would do last night, raising concerns over the passing on of the Bank cut.

Mr Darling cited action the government had taken to achieve financial stability and measures in his Pre-Budget Report to protect homeowners from repossessions. He said: "We will do more to make sure that the wider availability of lending is kept going. We want businesses and homeowners to be able to get affordable credit."

He told his Edinburgh audience that Royal Bank of Scotland and the superbank created by the takeover of HBOS by Lloyds TSB, if the move goes ahead, will have "legally binding commitments to maintain lending". He added: "We are ready to take further steps to build on what we have already done to get responsible lending going again."

However, experts warned that the lenders' decisions showed that continued interest rate cuts alone – especially those not passed on in full – would do little to reinvigorate an economy sliding deeper into recession.

Neil Saunders, a consulting director at the consumer forecaster Verdict Research, compared the 1 per cent cut from the Bank's base rate to "facing a tsunami and holding up an umbrella". He said: "It's not a solution. It's about trying to ease some of the decline, making sure the eventual landing is not too harsh and managing for the longer term.

"If the Bank had wanted to ease some of the pressure on the high street, they would have had to act six to eight months ago."

Yesterday's cut by the Bank followed a 0.5-point reduction in October and last month's surprise 1.5-point reduction. It means that the Bank's official rate is now the lowest since 1951, the year Sir Winston Churchill was re-elected prime minister.

Banks such as HSBC and Lloyds TSB said they would be passing on the one-point reduction in full, cutting annual repayments on a £250,000 mortgage by about £1,700 a year.

But despite Gordon Brown, the Prime Minister, saying that banks had "a duty" to pass on the reduction, Halifax and Nationwide said they would limit the cut in their default rates. The Halifax decision comes despite its parent company, HBOS, being in line for £11.5 billion of taxpayers' cash if its takeover by Lloyds TSB goes ahead.

George Osborne, the Conservative shadow chancellor, said: "This is yet more evidence that Gordon Brown's bank recapitalisation plan is failing. We need radical action to get bank lending flowing again."

Halifax strongly defended its decision, saying it had been one of the few institutions to pass on in full the last two interest rate cuts. It said its tracker rates would fall by the full 1 per cent, while about half of its 2.5 million mortgage holders were unaffected as they were on fixed rates. It estimated about 375,000 of its customers would be affected by its decision not to pass on the cut in full.

The bank said it was also entitled to make a "reasonable profit", at a time when inter-bank lending rates were averaging 5.46 per cent – way above the Bank of England's rate.

The Halifax and Nationwide were not alone in failing to pass on the full reduction. Many other lenders were expected to rely on escape clauses in their small print to avoid doing so.

So-called collars allow lenders to refuse to mirror the base rate when it drops below a certain level, typically around 3 per cent.

Before addressing Edinburgh Chamber of Commerce, Mr Darling said: "We are ready to do whatever we can to help the banks not only build their position but also to lend. But it is absolutely essential that they help their customers and that they treat their customers fairly. Customers know they have to stick to their side of the deal – they expect the banks to do exactly the same thing. I also said I wanted to see the interest rate reductions announced by the Bank of England passed on."

But the Bank made clear, in a statement explaining the rate change, that its primary motivation in cutting the cost of lending was to avoid the economy being crippled by deflation. This contrasts with the Prime Minister's hope that Britain will spend its way out of the recession after last week's VAT cut.

Business customers with the BoS will see rates cut by 1 percentage point, as will those with Lloyds TSB and RBS.

The rate of inflation, 4.5 per cent, is expected to fall sharply this month as a result of lower fuel and food prices. Last month, the Bank's monetary policy committee said it feared inflation could turn negative next year – hugely damaging, as it removes the incentive for firms to invest.

Experts warned that the base rate cut would do little to reinvigorate an economy in recession. The housing market has seized up as a result of the difficulty of obtaining mortgages, while the collapse in global confidence is seeing thousands of workers laid off daily.

Yesterday, Halifax reported a 2.6 per cent fall in house prices – the biggest month-on-month fall since 1992.

Job losses yesterday also involved HM Revenue and Customs and the high-street retailer Pier.

Alan Tomlinson, of the insolvency practitioners Tomlinsons, said: "There's a misconception that interest rate cuts are a panacea for business. While they can help boost confidence, the reality is they make very little difference in the short to medium term to companies that are struggling."

Peter Bolton King, the chief executive of the National Association of Estate Agents, said: "Low rates will increase confidence in the market, but will not increase mortgage approvals. Bringing buoyancy back to the market lies not only with low interest rates but, crucially, also in new lending. Government and lenders must do more to encourage first-time buyers on to the property ladder in order to reverse the current downturn in the market."

FACT BOX

THE cut in interest rates will leave at least one group out of pocket – savers.

This could have knock-on consequences for banks, who need old-fashioned depositors to shore up their finances.

Some banks may, however, keep interest rates high on savings accounts in a bid to entice larger deposits.

Angela Knight, of the British Banking Association, said it was important to think of the impact of interest rates on savers as well as borrowers.

She said: "The banks have got to balance the requirements of both savers and borrowers. Some of the rates will be passed down."

But she said there would still be "choices" in the market for savers. "Everything is related to that base rate but it is not necessarily all at the base."

Adrian Coles, director general of the Building Societies' Association, said: "Savers will be disappointed at today's news. Building societies which pass on both this base rate reduction and the last could halve the interest which they pay to their investors in a very short period of time.

"A large proportion of the funds invested in building societies are held by those over the age of 55. Building societies will wish to do what they can to protect pensioners."

The UK has more savers than borrowers, although the amount of debt is significantly higher than the total saved.

BACKGROUND

THE last time rates were this low was 1951. It was the year of the Festival of Britain, of Sir Winston Churchill's return to No 10, of King George IV – and the start of what has been described as a golden age in recent British history.

The average house cost £2,100 (equivalent to £48,000 in 2008 once inflation is added), a loaf of bread was 6d (2.5p in decimal currency) and the Bank of England base rate was 2 per cent.

Amazingly, the Bank had retained that rate since October 1939. It lasted all the way through to 8 November, 1951 – barely believable in comparison to today's economy, when global conditions can see rates change by 1.5 points a month.

Petrol was 3 shillings a gallon, a cinema ticket cheaper at 2d, All About Eve won the Oscar for best film – although its star Bette Davis lost out to Judy Holliday for best actress – and roads were filling with cars such as the Morris Minor, which cost £520 new (£12,000 today), and the Humber Hawk, which sold for £1,035 (£24,000 in today's prices).

Newcastle United defeated Blackpool 2-0 to win the FA Cup, and the future Geordie legend Kevin Keegan was born.

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