Why don’t banks pass on interest rate cuts?

bank.jpgChances are you haven’t been a regular visitor to the British Chambers of Commerce’s (BCC) news page over the past year and a bit; but if you have been, you may have noticed every month around this time, David Kern, the group’s economic adviser, starts making ominous warnings about bank rates.It usually goes something like this: “Last month’s catering/retail/manufacturing/piano tuning figures were worse than expected. Businesses are in trouble. The Bank of England’s Monetary Policy Committee (MPC) needs to reduce the banks rates to save the catering/retail/manufacturing/piano tuning industry. Or else.”Last month, after it had spent months climbing to 5%, the MPC finally cut the base rate by half a percent. As the BCC celebrated its victory by cheerfully issuing another stern decree to cut rates even more, business owners spent the month wondering exactly where their promised savings had gone.Why didn’t the banks pass on interest rate cuts to their customers? Well, it’s quite simple – banks don’t have as much to do with the Bank of England as you would think.Banks don’t buy their money off the Bank of England – they buy it off each other, at a rate determined by the supply and demand of money, called the Libor, or London interbank offered rate. After the past few months’ turmoil in the financial markets, demand for money is particularly high at the moment, which means the Libor is also particularly high.So while banks will be delighted if the MPC announces a cut for the second month in a row today; businesses, consumers and homeowners probably won’t feel the benefit as banks use the savings to shore up the capital they’ve lost over the past few months.Unfair? Of course – mais c’est la vie.Image courtesy of Flickr.

We use cookies to create the most secure and effective website possible for our customers. Full details can be found here