{"id":3133,"date":"2010-12-21T11:21:08","date_gmt":"2010-12-21T11:21:08","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=3133"},"modified":"2025-03-27T15:49:10","modified_gmt":"2025-03-27T15:49:10","slug":"uk-bank-rate-hike-could-have-limited-impact-on-lending-rates","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=3133","title":{"rendered":"UK Bank rate hike could have limited impact on lending rates"},"content":{"rendered":"<p>One of the many unfair criticisms of British banks is that they have failed to &#8220;pass on&#8221; official interest rate cuts, using wider margins to boost profits. Such claims are &#8220;supported&#8221; by reference to unusually-large spreads between lending rates and Bank rate &ndash; the average interest rate on the outstanding stock of bank and building society mortgages, for example, is currently 3.0 percentage points above the 0.5% Bank rate versus an average of 0.6 points over 2005-07, before the financial crisis.<\/p>\n<p>Such statistics, however, are bogus because banks are unable to obtain marginal funding at Bank rate, or even at quoted short-term interbank rates in any size. A better guide to their cost of borrowing is the average interest rate on household time deposits &ndash; currently 2.6%. The spread of the average mortgage rate of 3.5% over the time deposit rate is 0.9 percentage points, below the 1.1 point average over 2005-07 &ndash; see chart.<\/p>\n<p>Net interest income, in fact, suffers rather than benefits from low official rates, partly because banks are net lenders of funds at Bank rate as a result of QE &ndash; their cash reserves at the Bank of England now stand at &pound;140 billion, or 3.7% of their sterling assets, versus about &pound;20 billion before the crisis. The Bank, rather than commercial banks, is enjoying a major boost to its net income, with reserve liabilities earning Bank rate used to finance a gilt portfolio with an average running yield of about 4%.<\/p>\n<p>The disconnect between Bank rate and banks&#8217; funding costs undermines another common claim &ndash; that lending rates would fully reflect any rise in official rates, resulting in a squeeze on borrowers&#8217; incomes that could abort the economic recovery. With the time deposit rate so far above Bank rate, it is much more likely that this spread &ndash; rather than lending rates &ndash; would take the strain in the initial stages of any policy tightening.<\/p>\n<p>An increase in Bank rate, in other words, would help to bolster the Bank&#8217;s inflation-fighting credentials and cap inflationary expectations without material damage to economic prospects.\ufeff<\/p>\n<p><span class=\"full-image-block ssNonEditable\"><span><img decoding=\"async\" src=\"\/storage\/graphs\/uk-household-interest211210.gif?__SQUARESPACE_CACHEVERSION=1292933238651\" alt=\"\" \/><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the many unfair criticisms of British banks is that they have failed to &#8220;pass on&#8221; official interest rate cuts, using wider margins to boost profits. Such claims are &#8220;supported&#8221; by reference to unusually-large spreads between lending rates and Bank rate &ndash; the average interest rate on the outstanding stock of bank and building [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-3133","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3133","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3133"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3133\/revisions"}],"predecessor-version":[{"id":5442,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3133\/revisions\/5442"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3133"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3133"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3133"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}