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Mervyn King: Rate cut would put building societies at risk

King in front of the TSC this morning
King in front of the TSC this morning

Bank of England governor Mervyn King says the potential impact on building societies’ margins is part of the reason why the Bank of England has deployed quantitative easing rather than cutting interest rates further.

Asked this morning by Treasury select committee chair Andrew Tyrie why the Bank had not accepted the International Monetary Fund’s suggestion the UK should consider a rate cut to 0.25 per cent, King said building societies have warned him that this would hit their margins and risked pushing them out of the market.

King said: “Arguments that led us not to go below 50 basis points are still in play. We are concerned we would squeeze the net interest margin, particularly for smaller building societies and that would make their position vulnerable. I do not think pushing out small building societies from the market would be a wise course to pursue.”

Nationwide has in excess of £50bn worth of mortgages on a standard variable rate capped at 2 per cent above base rate. According to its preliminary results, published in April, this is having a £750m “adverse impact” on annual group profits.

Both King and Monetary Policy Committee external member David Miles told MPs the Bank’s QE programme, worth £325bn to date, will in any case have a greater impact than a rate cut.

King said: “A very small cut in base rate will not make a big difference what we have been doing with asset purchases. That is, in our opinion, very much bigger than a cut of 25 or even 50 basis points.”

Miles said there was a question mark over whether a cut in rates would lead to lower costs and better availability of credit or higher demand in the economy.

He said: “Because there is that issue with some building societies and other lenders about it squeezing their profitability I think there is at least a question mark over whether a rate cut would do any good. As long as we have other effective levers, which we do in QE, cutting rates is not the most attractive policy.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. It is naturally or paramount importance to protect the profits of building societies and banks. After all they have had the thin end of the stick after the credit crisis.

  2. that said Chris F it is in everybody’s interests to have a strong banking/financial services sector

  3. Never mind the base rate get the TSC to look at Credit Card interest rates, people are being bled dry by this puposely overlooked part of the market. Disgraceful!

  4. In support of Hugh Jeego’s post it is tantamount to usury for Credit Cards to be charging the rates they do. On the basis that they pay 4-5% for their funding most will therefore have margins of 10% even 20%.
    While banks will claim they have higher levels of bad debt on CC this is hardly a reason to fleece good payers correctly managing their finances.

  5. To Chris F at 1.29pm – please show me where banks were mentioned in the article or in King’s comments.

    You are right (although I suspect you were trying to be sarcastic) to say that building societies have had the thin end of the stick.

  6. to Richard Rouse: The interests of building societies are being put ahead of those of the population of this country.

    Perhaps a few building societies will find their profit margins squeezed, but then again millions of ordinary folk will find that a further cut in rates will mean real money is put into their pockets.

  7. And what about the poor saver (the main source of Building Society funds)? Where do they put their money with no risk?

  8. To Chris F: there are approximately seven times more savers than borrowers in building societies.

    That pretty much makes your plea for ‘ordinary folk’ to have more real money put into their pockets into context, doesn’t it?

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