Lenders cave in to Government rate cut pressure

[Mortgages]

Following the Bank of England’s historic 1.5% rate cut yesterday, Britain’s lenders have begun to respond to Government and media pressure to pass on the full rate cut to borrowers. This morning, the chief executives of Britain’s top banks were summoned to Downing Street to meet with Chancellor Alistair Darling, where he demanded that they pass [...]

More: Lenders cave in to Government rate cut pressure

[Ronny]

It is important to note that stating banks should be 'passing on' rate cuts is not really true. A cut in the Bank of England (BOE) has no effect whatsoever on were lenders borrow their funds from.

Many banks and building societies will borrow form the money markets. the rate at which their borrowing will cost can be gauged by 3 month LIBOR. This LIBOR used to follow BOE quite closely but recently the margin between the two is is much higher.

This basically means lenders will not lend money at a lower rate than which they can borrow it at themselves.

Therefore until LIBOR rate sees much larger reductions, the mortgage rates that are on offer to the public will remain stagnant.