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Nationwide warns base rate cuts will hit hit smaller lenders

robert gardner chief economist nationwide

Nationwide has warned further cuts to the base rate could hit smaller lenders and reduce competition in the mortgage market.

In July, the Bank of England’s Monetary Policy Committee said it might look to cut the 0.5 per cent base rate even further if its Funding for Lending scheme fails to increase lending.

There is widespread concern that smaller lenders and those with standard variable rates tied to the base rate, such as Nationwide, will be hardest hit by further cuts.

Nationwide’s preliminary 2011/12 results, published in April, outlined the £750m “adverse impact” the current rate of 0.5 per cent is having on group profits. Nationwide holds £50bn in mortgages on its SVR, which is capped at 2 per cent above the rate.

Nationwide declined to speculate on what impact a rate cut would have on its profits, but chief economist Robert Gardner warns further cuts would “put significant pressure on lenders and interest margins”.

He says: “The Bank of England recognises cuts could reduce the availability of credit to the wider economy and it says this could have particularly negative effects on some smaller building societies who are particularly vulnerable, reducing competition in the marketplace.”

Trinity Financial Services product and communications manager Aaron Strutt says: “If the base rate comes down, I do not think the banks would increase their LTVs or lower their rates, so the Bank should really consider whether it is a good move.”

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