Now that Brown has copied the Tory proposal to underwrite bank loans, what’s the real picture on interest rates? Since the UK debt crisis started, the Bank of England base rates have become woefully detached from the rates charged to real people. This is powerfully summarised by three graphs from Citi, which I reprint here..
Over last year, BoE base rates fell by three points. Only half of this fall was “passed on” by fixed-rate and variable mortgages, while the cost of borrowing money actually rose for overdrafts, credit cards and personal loans. As the graph shows:
The most misery will be felt by those who have unsecured personal loans – ie, the poorest. Just look at how the rate here has soared during the credit crunch, to a rate that will send debtors into the hands of the loan sharks – or bailiffs
For years, the BoE base rate was a good indicator. If it fell, the rest of lending costs also fell – and by about the same amount. But as the final graph shows, the spread now is mammoth.
This is why tweaking the base rates won’t work. The banks can’t raise money at anything like the BoE base rate – just look at the utter failure of Lloyds TSB and HBOS to raise money from the market. Many UK banks are locked in to lossmaking deals (ie, tracker mortgages or low fixed-rate company loans) and suffering. They have to compensate by overcharging on the new and renewed loans – and must keep doing so until they can raise money more cheaply. Even the Tory proposal of underwriting bank loans, would probably still mean rates at LIBOR+100bps. Cheap credit is not coming back. End of story.
Many people are waiting for things to get back to normal in the credit market. But perhaps they already have
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