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Collars off as the leash goes on

The heavy Government and FSA pressure being placed on mortgage lenders increased a few notches this week as tracker collars were banished and ministers warned explanations must be given if rate cuts are not passed on.

Immediately after the Bank of England dropped interest rates to 2 per cent on Thursday, MPs began beating on the doors of the mortgage lenders calling on them to pass on the cut.

The all-important three-month Libor, which sits at 1.71 per cent above base rate, was ignored as many in the press marched on, led by Brown, Darling and Mandelson calling on the big banks to do what they are told.

The FSA, speaking at the Council of Mortgage Lenders conference in London on Tuesday, also sent out a warning over collars. It made sure to remind certain lenders that a tracker collar that didn’t appear on a KFI didn’t count. So Halifax duly dropped it, and Nationwide followed, after initially stating that their collar would stay.

Nationwide passed the full cut to its tracker mortgages, as did Lloyds, with HBOS only passing on 0.25 per cent of the cut – for now.

Of course, at the same time, the angry mob, with pitch forks and torches in hand, demanded that the very same lenders do not touch their savings rates, which should theoretically fall with rates.

Banks are beginning to go positively purple as the Tripartite leash leaves little room for manouvre.

At least the banks got support from an unexpected source this week as Lib Dem Shadow Chancellor Vince Cable was good to his word and refused to join the baying mob calling for full rate cuts.

At Tuesday’s CML conference, Cable told delegates that he had come to realise the position many banks are in.

He said: “You will all be faced with the political community instructing you to pass on any interest rate cuts to your borrowers, and you have to with tracker mortgages, but some newspapers will be ringing me up saying: ‘Give us a good, juicy quote, we’ll put you on the front page give these guys a good kicking’.

“I think I have got to the stage where I understand your problem, there obviously is a problem with funding costs. So I will not be one of the people in the queue instructing you to fully pass on the cost, because it’s not the case.”

And no one can deny that the witch hunt is working for borrowers – advisers have reported happy mortgage holders on the end of the phone after being told they are to save hundreds of pounds a month. But can this go on?

One adviser told Money Marketing: “I called a client as he was going to save £200 a month thanks to this cut. He was over the moon, but he will just go out and spend that windfall.”

And that’s the problem – many economists and experts are looking to the next cut already, with 0 per cent very much on the horizon. But what happens then? How can the Government continue to tighten the leash if they have no leverage? Banks cannot go on lending at 0 per cent, as real economics kick in and wages slow down and spending increases.

The Government has set us up to spend, spend, spend into 2009 and has firmly put the misbehaving mortgage lenders in their place. Banks have been strangled into submission but how long can this position continue?

They want to give Brits a soft landing as we fall into a recession, but there is a risk its attempts may make the fall longer, and harder than anyone ever imagined.

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