We Will Hear Screams of Profiteering

From the usual sources:

The Monetary Policy Committee cut its base rate from 5.25 per cent to 5 per cent amid growing concern about slowing growth in the economy.

But some lenders increased the rates on some of their loans hours before the announcement. Yesterday morning, Nationwide – the biggest building society – and Alliance & Leicester said they were increasing rates on their new fixed-rate mortgages. Woolwich made a similar move this week.

Other lenders are expected to follow suit. This is because the interest rates banks charge each other to borrow money have not matched recent cuts in the Bank\’s base rate.

It\’s actually more basic than that. The authorities do not control anything other than that Bank base rate. All other interest rates can be influenced by that rate, to be sure, but the influence lessens the longer term the loan: and mortgages are, almost by definition, the longest (or almost the longest) term loans in the market.

It\’s always been true this, it\’s just we\’re seeing at the moment that the influence is less than usual.

But, whatever the truth of this, we\’ll have articles around the place insisting that this is just the bastard banks profiteering off the backs of the borrowers.

5 thoughts on “We Will Hear Screams of Profiteering”

  1. Well the problem is that the bastard banks are all for profiteering, but the moment they make some losses (becuase of own arrogance, stupidity and greed for profiteering), they come running whining back to the central banks, who instantly oblige by printing more money. The latest wheeze seems to be to ask the taxpayer to bail the banks out, by subsiding mortgage finance one way or another.

    So yes, the banks are exactly as you describe them. Ever tried asking a bank to bail you out when your business plan didn’t work out? Thought not.

  2. With Northern Rock out of the mortgage business we have seen a 10% decrease in supply of mortgages. Therefore prices will rise.
    The people profiteering at the moment are the depositors getting 6%+ and that rate is being driven by NR.

  3. “but the influence lessens the longer term the loan”

    Not quite: surely the influence lessens the longer the term for which the rate is fixed: the term of the loan is largely immaterial if the interest charged on said loan is variable over that term.

    Tim adds: Well, not quite. Sorta, but not quite. Credit risk rises the longer the loan too, even at variable rates.

  4. We should have had proper fixed rate mortgages years ago, by which I mean the 15 to 30 year jobs they have in the US not the 2 year fixes here that are little more than floating rate with a big fee. This would significantly reduce the damage to existing home owners from the decision by the BoE to change the price of money at the margin. However, the “authorities” love the greater control it gives them (effectively monetary policy in the UK acts like fiscal policy) and the Banks don’t want fixed rate, re-financeable mortgages because they are far less profitable. They want the public to bear the interest rate volatility risk instead. The banks main crime was to kill off the Miles report into fixed rate mortgages a few years back.

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