An industry official has expressed concern that the Bank of England is effectively losing control of retail interest rates, stating that the recent base rate cuts by the central bank have often gone ignored by lenders, who have continued to raise their interest rates despite the base rate cut. Since December there have been three cuts in the base rate, taking it from 5.75% to 5%, but many lenders have continued hiking up the interest rates on borrowing such as mortgages, personal loans, and credit cards.

Following one of the recent base rate cuts the industry official stated: ‘Today’s decision is irrelevant as far as pricing for mortgage borrowers is concerned. The Bank has effectively lost control of retail interest rates, which have become decoupled from the base rate.’

He went on to state: ‘Any change in the Base Rate is likely to have little or no impact on the cost of raising funds for lenders. Together with the need to control demand this cost will continue to dominate retail lenders’ pricing decisions.’

Many lenders say that they have been forced to put up interest rates as a result of the increased costs and difficulties involved in getting funding on the wholesale markets, with inter-bank lending having become far more difficult as a result of the global credit crunch. However, some industry officials state that lenders are now undermining the Bank of England by not moving their mortgage interest rates in line with the central bank, and that this could result in the central bank no longer being able to control retail interest rates, which will have a knock on effect on the economy.

The base rate remained at 5% in May, but many economist now expect a further rate cut in June, although the effects may be mixed due to lenders’ reactions to the latest rate cuts.

Recent additions:

• Mortgage approvals slumped in March
• Credit crunch means slump in mortgage lending
• Could you be entitled to a break in monthly mortgage repayments?
• Nationwide asks for larger deposits from borrowers
• Mortgage lending levels remain subdued

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