King Helps Brown Turn Up Heat on Banks Refusing to Cut Rates

By Brian Swint

Nov. 7 (Bloomberg) -- Bank of England Governor Mervyn King is turning up the heat on financial institutions refusing to cut interest rates for the country's homeowners.

As Prime Minister Gordon Brown struggles to convince lenders to ease credit amid the worst housing slump since the early 1990s, King's central bank yesterday cut its key rate by 1.5 percentage points to a five-decade low of 3 percent. The scale of the move, the biggest since 1992, will put pressure on Lloyds TSB Group Plc and others to provide cheaper loans.

``The size of the cut is so glaringly large, they'll just have to make some effort to pass along some of it,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. ``For banks to say they're not in a position to pass any of the cut on would increase the political heat so much they potentially don't want to go there.''

Brown is pushing banks to comply with the strings attached to last month's 50 billion-pound ($78 billion) rescue plan. While the Treasury wants the industry to return lending to 2007 levels, mortgage lending is approaching a record low amid the biggest financial crisis in almost a century.

``I want to ensure that banks pass the benefit on to people,'' Chancellor of the Exchequer Alistair Darling told BBC television after the rate decision. ``Banks need to play their part. They now have to help their customers.''

Reluctance

So far, banks are still reluctant to comply on concern credit markets will stay strained. Yesterday, Nationwide Building Society pulled all its mortgage offers tracking the Bank of England's rate. Northern Rock Plc, which was nationalized this year, and Abbey National earlier this week increased rates on tracker deals even as most economists forecast a 50 basis-point cut from the Bank of England.

``Although bank rate has come down, the level at which we fund is still a long way above bank rate,'' said Martin Ellis, chief economist at HBOS Plc, the U.K.'s largest lender. ``It's going to take a while to come through. The cut will help the market, but it's hard to quantify by how much.''

At 5.56 percent, the cost of borrowing pounds for three months was 1.06 percentage points above the Bank of England's benchmark rate yesterday morning. The gap was 0.2 point before credit markets seized up last year.

The lending drought is putting pressure on the U.K.'s housing market, which is the biggest store of wealth for British citizens. Banks approved 33,000 mortgages in September, a third of last year's monthly average, and property prices plunged 14.9 percent in October from a year ago, HBOS said yesterday.

Mortgage Rates

Banks have barely cut their lending rates since December of last year. The average rate on home loans that track the central bank's rate was 6.12 percent in September, when the Bank of England's benchmark was 5 percent. That compares with 6.2 percent in December when the key rate was at 5.75 percent.

The rate cut may also help spark interest in a housing market that's been falling for a year. Traffic on Rightmove Plc's Web site, which displays more than 90 percent of U.K. homes for sale, leaped 20 percent after the decision.

``Buyer affordability and the start of recovery in the housing market is now in the hands of lenders,'' said Miles Shipside, commercial director at Rightmove.

To contact the reporter on this story: Brian Swint in London at jfraher@bloomberg.net