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Bank of England highlights positive UK lender reaction to rate cuts

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  • 28/09/2016
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Bank of England highlights positive UK lender reaction to rate cuts
Initial lender reactions to the Bank of England (BoE) Base Rate cut are ‘good’, according to the central bank, with the vast majority of standard variable rates on existing mortgages already reduced.

During a speech at a Bloomberg conference, Minouche Shafik, deputy governor of markets and banking at the BoE, rebutted criticisms that banks would be unable to pass on ultra-low interest rates to customers, explaining that since the introduction of the Term Funding Scheme lifetime tracker mortgage rates were on average 25bps lower.

Following the Monetary Policy Committee’s meeting in August, the Bank of England said it ‘fully expected’ lenders to pass on the 0.25% rate cut to consumers. To support this, the Bank launched the Term Funding Scheme, which is available for four years as long as firms maintain lending to the real economy.

Shafik explained that analysis conducted by bank supervisors at the Prudential Regulation Authority (PRA) prior to the rate cut indicated that net interest margins on banks’ retail business, which were around 230bps in 2015, would be able to withstand a reduction to the base rate.

“However, we still faced the risk that banks would choose to preserve these existing margins, dampening the pass through of our change to rates faced by households and consumers,” she added.

Shafik said the Term Funding Scheme was “explicitly designed to counter that risk” by “tethering banks term funding costs more closely to our policy rate”.

“The initial signs are good – standard variable rates have already been or, we expect, shortly will be reduced on the vast majority of existing mortgages, and the rates available on new lifetime tracker mortgages are on average 25bps lower,” she added.

“Though it is of course difficult to say how much of this is directly attributable to the TFS.”

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