Banks and building societies under fresh pressure to cut mortgage rates

Banks and building societies are under fresh pressure to cut their mortgage rates after the rate at which they lend to each other fell to the lowest level for more than 20 years.

The rate, known as Libor, fell below one per cent for the first time since it was set up in 1986. This means that banks, in theory, have never been able to borrow money so cheaply.

However, home buyers have failed to benefit, with the average two-year tracker rate mortgage for new customers climbing from 3.73 per cent a month ago to 3.77 per cent yesterday, according to the financial publisher Moneyfacts.

Mortgage experts said lenders were being “unfair” to home owners and their stubborn refusal to cut rates was threatening a recovery in the housing market and the wider economy.

Some of the worst offenders are the nationalised and part-nationalised banks — Halifax, Lloyds Banking Group and Northern Rock. None of them offers a tracker rate mortgage below 3.25 per cent, despite being given billions by the taxpayer to rescue them from collapse.

Earlier this week, banks were accused of “ripping off” consumers after it was disclosed that they were pushing up the price of fixed-rate mortgages to their highest level — relative to the Bank of England rate — for at least 20 years.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “I just do not accept that it makes any sense for the nationalised and semi-nationalised banks to be building up capital reserves. There is no risk they will fail because they are owned by the taxpayer. Their primary requirement is to support the economy through lending.”

Mick McAteer, a former head of policy at Which? and now the head of the Financial Inclusion Centre think tank, said: “Banks have been using the cuts in the Bank of England rate to increase their revenues by billions.

“There is a basic lack of competition and they have a stranglehold. People are paying more than they should for credit cards and overdrafts as well.”

When banks borrow money to fund their variable rate mortgages, such as tracker-rate deals, they go to the wholesale money markets. Here, the cost of money is set by a rate known as three-month Libor.

This rate has fallen steadily in recent months as City investors become increasingly convinced that deflation will remain for some time and the Bank of England will keep its Bank Rate at 0.5 per cent into next year. In March, three-month Libor was above two per cent. Yesterday it fell from 1.01 to 0.99 per cent.

With mortgage rates increasing and banks’ borrowing costs falling, lenders are able to increase their profits.

Four million home owners have tracker mortgages that rise and fall with the Bank of England base rate, currently at its lowest level. However, banks have gradually raised the starting rate for trackers by withdrawing their most competitive deals.

The Council of Mortgage Lenders argued that the cost of borrowing was a “complex jigsaw” and not solely set by Libor. “It is misleading to assume that higher fixed rates simply reflect a desire to increase profitability,” a spokesman said.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bernanke comments give the markets hope

Yesterday's fairly restrained market was kick-started into life in the afternoon by comments from the Federal Reserve Chief, seemingly directed at Congress, in which he intimated that the US economy required a new fiscal stimulus to get it back on track.

Both the Dollar and the Stock Market rallied with the Euro hitting a new 18-month low this morning. Cable also briefly fell below 1.7100 but early morning jitters have halted the Dollar's early progress.

Technically, there is strong potential for a further immediate strengthening of the US currency, especially if doubts persist as to the likelihood of a turn around in the UK and Eurozone economies.

LIBOR interest rates continued to correct rapidly in the Dollar's case, but in a more sedate manner in Euro and Sterling.

The freeing up of the Money Markets is vital to an economic pick up so expect further Central Bank measures to keep the momentum going. Expectations for huge liquidity adds plus continued official rate cuts should keep the momentum going but it is a return to confidence between Money Market operators that will determine whether period lending resumes.

Talking of economic stimulus, the UK, as expected, reported Government borrowing at a record level last month with September's figure surging to £8.1 billion, almost double the number from 12-months ago. Estimates for the total for the year are for an excess of a massive £60 billion, with rises in the deficit for the following 2-years.

With the assertion from Brown yesterday that the UK was looking to stave off a continued slide into recession by spending, plus the additional funding required to fund the Financial Market's bail-out plan, these borrowing figures look destined to deteriorate before any improvement for increased tax revenues are seen.

That's not to say that this is not the right way forward for the UK economy in the short term.

Bringing forward labour Government construction projects to stimulate and underpin the UK building and civil engineering sectors could certainly prove to be inspirational.

The problem is that despite having a fistful of factors that they are able to influence, the UK Government is unable to do anything about the one thing that is fundamental to the economy's recovery. That is increasing consumer demand from its current lows.

Confidence is at such a low that even if No. 10 were able to slash interest rates, it is going to be some time before the consumer returns to the High Street in any numbers. It looks as though it is going to be a long winter……

Elsewhere, Iceland becomes the first sovereign state since the UK in 1976 to go cap in hand to the lender of last resorts, the IMF.

For those of you old enough to remember the results in the UK following the IMF loan to the then labour government, the restrictions likely to be imposed upon Iceland will be draconian making redemption of the frozen deposits (no pun intended) a distant prospect.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Equity markets support central banks

UK and European moves to restore confidence in financial markets were met with strong approval by markets yesterday as the FTSE, Dax and CAC40 all rebounded.

The US recorded is largest one day rally since the recovery following the 1929 crash while Asian shares continued the trend overnight with the Nikkei climbing a record 14.2%, and the Hang Seng up 4%.

The FTSE gained 8.3% on the back of the details that emerged of the UK government's plans to inject some £37bn that will result in a part nationalisation of some British banks.

The UK model was mirrored in the Eurozone with a number of nations announcing plans. Germany guaranteed €400bn of interbank lending and provided a €100bn fund to inject capital while France guaranteed up to €320bn of interbank lending with a further €40bn at its disposal to provide new capital. The Dax and CAC40 both ended the day over 11% higher.

The US has this morning announced that it will invest $125bn in nine major American banks as part of its $700bn plan, with Treasury Secretary Henry Paulson is due to speak later today to discuss the plans which also involve a further $125bn to recapitalise financial institutions across the US. The Dow rose 11.08% yesterday.

Three month GBP Libor set slightly lower at 6.27 and three month Dollar Libor fell 7 basis points to 4.75, in what may be signs that interbank lending markets are reacting positively to government intervention.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The Pound feels the heat

As expected the Bank of England announced details of the £50billion plan to help stem the credit crisis. The Governor, Mervyn King said that the scheme is aimed to improve liquidity in the Banking system. It should also increase confidence in financial markets, he added.

This will only apply to mortgage related debt and cannot be used to finance new lending. The initial period will be for one year with Bank's having the option to renew the facility for up to three years.

There were many comments following the announcement, the facts remain that the response from the Money Markets was muted, with the 3 month Libor fixing less than 1 basis point lower however this was the 5th consecutive decline.

The Gilts market saw a correction with yields in 2-3 year tenors down around 3 basis points.

The BBA (British Bankers' Association) have initiated a panel for discussions on whether a change in the calculation of LIBOR is warranted. The Director of the BBA Libor group is quoted by saying a change may be necessary, however changing the rate radically at this time would not be the best strategy

RBS announced their plans to increase capital, with a £12billion rights issue.

On FX news - following Friday's gains, the Pound weakened yesterday against the Dollar. Initial moves this morning are extending GBP losses

The Dollar suffered in addition with the further writedowns and bad news from Wall Street.

The EUR retraced slightly against the US Dollar following comments from the Director of the IMF Michael Deppler, saying that the ECB may need to cut interest rates within 6 months to bolster the economy. Although inflationary pressures remain in the Euro zone, until commodity prices start to drop I doubt that the ECB will action any change soon.

Away from the UK - UBS admitted that a lack of risk control and ambitious plans to grow revenue led it to its huge losses when the global credit crunch struck. So far total write downs are $37billion.

In Addition, further writedowns from the Bank of America, contributed to their posting of Q1 net income down 77% (Y/Y).

Oil continued to trend upwards, closing over the $117 level amid continued concerns on supply restrictions.

On the Economic front, we do not start to get stuck in until tomorrow.

Notable release of the day will be from the US with existing home sales for March.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news - The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks - This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.