Lenders urged to pass on latest rate cut

Britain's biggest mortgage lenders were coming under strong pressure last night to pass on the full benefit of lower interest rates to millions of homeowners after the Bank of England cut the cost of borrowing to 3.5%.

Consumer groups urged the leading mortgage providers to stop playing for time when three of the so-called "big five" - the Halifax, the Abbey National, and the Nationwide - delayed making a decision on how to respond to the Bank's surprise quarter-point cut.

The Bank cited slower consumer demand as one of the reasons for making borrowing cheaper. Both the Cheltenham and Gloucester and the Woolwich immediately announced they would boost demand by cutting mortgage rates by the full 0.25 percentage points.

Reducing the mortgage rate thus would cut the cost of a £100,000 interest-only loan by £20 a month, the C&G said.

However, the Consumers Association feared that the other lenders would widen margins by trimming home-loan rates by only 0.1% or 0.15%.

Mick McAteer, senior policy adviser at the Consumers Association, said the lenders would be looking for an opportunity to make higher profits by reducing rates for borrowers by less than those for savers.

"The big banks are past masters at the art of confusion marketing. This is the kind of environment they love," he said.

Mortgage lenders were criticised after the last quarter point cut in February for only passing on a fraction of the reduction to borrowers.

Urging them to quickly pass on the benefits, Mr McAteer added: "They've got to treat both sides [savers and borrowers] equally fairly."

High street banks HSBC, LloydsTSB, and Barclays all said yesterday that they would cut their benchmark savings rates by a quarter point.

A Federation of Small Businesses spokesman said hard-pressed companies would also be watching their lenders with suspicion. "There will be little surprise among small businesses that the banks would be dithering about whether to pass on the rate cut to their borrowers," he said.

The Bank said its ninth cut in interest rates since February 2001 was designed to boost growth. Rates are now at their lowest since January 1955.

It shrugged off the fact that inflation is above its 2.5% target and instead cited the hesitancy of global economic recovery, weakness of UK growth and sterling's recovery as reasons for the cut.

After a string of knife-edge decisions that had come down against a cut, the first meeting of the monetary policy committee presided over by the new governor, Mervyn King, decided that the risk of "subdued economic activity continuing in the short term", meant that lower rates were needed to prevent inflation falling beneath the government's 2.5% target.

Growth in the first quarter of 2003 was just 0.1%, the lowest for more than a decade.

Estate agents said that lower borrowing costs would revitalise the housing market, while the TUC and the CBI said the move would boost manufacturing and exports.

In its statement, the Bank said: "The global economic recovery has remained hesitant. Although the preconditions for recovery remain in place, the prospect for external demand for UK output is weaker than previously expected. Output growth in the UK has recently been below trend.

"Slower consumer demand and subdued private investment have so far offset the impact of higher public spending. Although RPIX [retail prices index] inflation is currently above the 2.5% target, this is the result of temporary factors which are expected to unwind in the coming months.

"Overall pay growth has been muted so far this year. The fall in the sterling effective exchange rate since the start of this year should help underpin growth, but in recent weeks that fall has been partly reversed, reducing the prospective impact on inflation."