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BoE’s Brexit plan challenged by world awash with cheap money
LONDON: The Bank of England’s first rate cut since 2009 looks unlikely to be passed in full to borrowers, despite the BoE being ready to lend banks as much as 100 billion pounds ($130 billion) to ensure it happens.
The launch of the Term Funding Scheme (TFS) - the BoE’s biggest intervention in Britain’s banking market in four years - is likely to offer a modest boost to growth. But it also highlights the difficulty of implementing cuts in interest rates as they near zero.
In a repeat of Reserve Bank of India governor Raghuram Rajan’s lament on Tuesday, Mark Carney, the governor of Britain’s central bank, said lenders had “no excuse” not to pass on August’s quarter-point cut in interest rates.
Britain’s biggest mortgage lender, Lloyds Banking Group , is holding off cutting its main rate, while First Direct, part of HSBC, reduced the interest rate it pays out on one of its savings accounts by 0.4 percentage points.
“The narrative presented was a bit simplistic,” said Ian Gordon, a banking analyst at Investec.
The key point is that British lenders vary greatly in how much they can benefit from the TFS, depending on whether they already have access to cheaper finance than the BoE scheme.
Major lenders such as Royal Bank of Scotland, Barclays and HSBC already have more cash than they have been able to lend out. For them, the TFS will do nothing to reduce the squeeze on their net interest margin.
As a result, interest rates on new two-year fixed-rate mortgages — Britain’s most popular type of home finance — were likely to drop by less than 25 basis points, Gordon said, as banks’ sought to preserve profits. “I think prices will come down, but I’m sceptical you will see them come 25 basis points lower,” he said.