Bastards!

Banks and building societies have been accused of profiteering after official figures showed that they had raised millions of their customers\’ mortgage bills before an expected cut in interest rates by the Bank of England.

How, how could they?

While a cut today should bring some respite for struggling home owners, analysis by The Daily Telegraph shows how banks have not only failed to pass on the previous cut, they have actually raised the average mortgage rate.

Hmm, this piece is (partially) by Edmund Conway, who is Economics Editor at The Telegraph. So clearly the reason can\’t be my immediate reaction.

The Bank of England doesn\’t actually control interest rates. What it does is conrol the rate at which it is willing to lend to banks. Now that has an influence, certainly, but it does not control rates.

In both the short and the long term interest rates are actually set by the market. Short term rates are LIBOR, the rate at which banks in London will lend to each other (such interbank lending is vastly larger than BofE lending to banks). One thing we\’ve seen in recent months is that LIBOR, something which is usually only a few basis points (that is, 100th\’s of a percent) above the Bof E rate has been at 50 or even 75 basis points above it. So, while the Bof E might have cut the rate at which it will lend to banks, it doesn\’t look as if short term interest rates have actually changed very much at all.

Long term interest rates I am less sure about. Well, I\’m sure that the BofE influences these even less than it does short term: I just don\’t have the information in front of me about how they have moved. Mortgage rates are of course tied to such long term rates. But I would be willing to make a substantial wager that long term rates have not fallen by as much as the BofE rate has.

Thus the story would be that the interest rate banks pay hasn\’t changed much, and nor have the rates at which they lend.

So my immediate reaction must be wrong for an Economics Editor would know all of that and would tell usif it were true, wouldn\’t they?

Bank of England data shows that the average mortgage rate has been inflated. When interest rates were previously 5.5 per cent – in May last year – the average mortgage rate was 5.66 per cent but when rates moved back down to that level in December the average was 5.93.

While that information is consistent with my hypothesis, the fact that we\’re told the banks are profiteering must be so, mustn\’t it? I mean, this is the Economics Editor.

4 thoughts on “Bastards!”

  1. Lenders have increased the price of risk in their mortgage book, that’s all. Competition had forced them to reduce the price of risk and other margins. Now the margin is being expanded and protected in anticipation of harder times ahead – as forecast by none other than the Economics Editor of the Telegraph, amongst others.

    The other thing happening is that the price that, a few months ago, bought say a 90% loan to value, now only buys say 80%, or less.

    I’m no fan of banks and lenders generally, but it’s a bit much to assume they’re profiteering, pure and simple.

    Though I can see why there are those who might see it that way; lenders haven’t covered themselves in glory over the years. But as you imply, it might be reasonable to expect better from Edmund Conway.

  2. What do they mean by “average rates”?

    Do they mean the advertised rates, the rates of what’s on the books or something else?

    For one thing, I’m sure that with all the problems in money markets, the rates at which building societies can borrow money on the markets have gone up.

  3. Another point is that a certain portion of borrowers are on tracker mortgages – the amount they pay falls automatically with BOE rate cuts. If the banks are having to pay higher rates to borrow and are also receiving lower payments from one section of their customers, they have to recoup the difference from those customers who are not on mortgages that track the Bank rate. So variable and fixed rates have risen.

  4. One simple check would be if someone couldl find the ‘average’ savings rate offered by the banks when rates were last 5.5%.

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