Britain’s high street banks risk a confrontation with Mark Carney unless they pass on the Bank of England’s interest ratecut to millions to borrowers.
Faced with a warning from the Bank’s governor to pass on the reduction, two bailed-out banks – Lloyds Banking Group and Royal Bank of Scotland – were among those still mulling over their response on Thursday to the new interest rate of 0.25%.
With mortgage rates already low and saving rates at rock bottom levels, banks have said they face a hit to profits as the gap between what they can pay savers and charge borrowers narrows. Lloyds, 9%-owned by taxpayers, has said it will take a £100m knock to profits. HSBC expects a $200m (£150m) reduction in its annual profits.
RBS will face questions about its response to the Bank of England’s demand that lower rates feed through to customers when it reports its results on Friday. Its shares fell 0.7% to 192p, while Lloyds declined by 2% to 51p, although Barclays rose slightly to 148p.
Carney, speaking as the Bank announced a package of measures to fend off a post-Brexit vote slowdown, said: “The banks have no excuse, with today’s announcement, not to pass on the cut in bank rate.” He told lenders to write to customers to tell them that their borrowing rates would be falling, adding that the Bank had deliberately tailored its response to Brexit to ensure their profitability would not be impaired.
Lenders were quick to acknowledge that customers with products contractually linked to the base rate would enjoy lower rates. But those products which allowed some discretion – largely standard variable rates (SVRs) – were being reviewed by many lenders.
Carney conceded that the cut, after more than seven years of already low interest rates, put savers in a very difficult position. None of the big banks moved on savings rates after the announcement, although they are likely to be under review.
Pensioners were also facing a hit as Hymans Robertson, a pensions consultancy, said the rate cut meant a £70bn increase in the amount company schemes needed to meet their commitments to scheme members, to a new total of £2.4tn. This has pushed up the aggregate UK company scheme deficit to £945bn, the worst it has ever been.
NatWest, owned by RBS, was still deciding whether to cut the 4% SVR paid by 17% of its mortgage customers. “We are currently reviewing whether we will make any changes to variable-rate products and will provide an update in the near future,” NatWest said.
Lloyds – whose chief executive, António Horta-Osório, had warned last week that “additional monetary measures will have only a marginal impact” – said: ““The 0.25% reduction will form part of the ongoing rate reviews across our product ranges. All variable rate products that track the Bank of England base rate will be reduced by 0.25% from September.” About a third of its 3 million mortgage customers are on the loans still under review, paying a rate of 3.99%.
Some lenders were quick to act, although many of them were starting from a higher level than those still pondering. Spanish-owned Santander will cut its SVR by the full amount in September, bringing it down to 4.49%, and 4.74% for former Alliance & Leicester customers.
Nationwide Building Society, which had initially said it was reviewing its approach to its SVR, later confirmed that it would pass on the cut in full from 1 September.
Across the market, about 50% of mortgages taken out since 2004 have fixed-rate loans, but 30% – approximately 2.3m loans – are either on a lender’s sSVR or a discounted mortgage pegged to it.
Other lenders also appeared to be reticent about cutting their SVR, including HSBC and UK Asset Resolution, the state-owned body which runs some Northern Rock and Bradford & Bingley home loans.
The decision by lenders to pass on cuts to SVRs is likely to depend on how the new term funding scheme – intended to give banks cheap access to up to £100bn of cash – operates. Lloyds had used a predecessor scheme widely, and analysts expected it to use the new arrangement.
Nationwide and Lloyds have some customers on old SVRs pegged to the base rate, which will automatically fall. But the vast majority of SVRs can be set at lenders’ discretion and do not have to move in line with the base rate. Previously, some have resisted passing on any or all of the drop.
• This article was amended on 5 August 2016. An earlier version referred to Northern Rock Asset Management where UK Asset Resolution was meant.