Since the financial crisis, interest rates on mortgages have fallen by much less than the Bank’s base rate – which has remained at 0.5% since March 2009 – said the Bank in its quarterly bulletin.
Banks were not only failing to pass on the sharp reduction in base rate but actually charging more, with new lending rates to households increasing in some cases. The spread on an unsecured £10,000 personal loan has surged from four percentage points before the financial crisis to around ten percentage points today.
Meanwhile, interest rates on credit cards and new loans have soared.
Placing additional pressure on consumers, banks have also hiked charges such as arrangement fees and penalty fines.
The Bank said part of the reason for the disconnect between base rate and lending rates stems from increased funding costs and higher expected losses on bad loans. But it also says banks are ramping up rates beyond these higher underlying costs in order to buffer their capital reserves.
“A larger residual is consistent with lenders increasing mark-ups over marginal costs for new lending, which may reflect a need to build higher capital levels within the banking sector,” said the report.
It added the relative rise in lending rates compared to base rate could also result from a decline in competition following consolidation in the banking sector at the height of the financial fallout.
Lloyds’ purchase of HBOS and Santander’s acquisition of Alliance & Leicester and parts of Bradford and Bingley have both served to reduce competition.
Bob Pannell, chief economist at the CML, said: “The Bank sets out a clear explanation of the influences on the pricing of new lending. Two particularly striking observations leap out.
“First, the pricing of new secured lending is emphatically downwards, compared with the price of new unsecured lending which is emphatically upwards. Second, the fact that lenders are seeking higher returns on new business is a logical response – even a desirable one – that should help lenders rebuild capital, improve investors’ perceptions, and ultimately bear down on funding costs over time.”
