Nationwide defies Alistair Darling on mortgage interest rate cuts

[ChimpMaster]

I agree with Nationwide - they are standing up for what their members want, and can afford to take this stance because they did not overextend in the crime spree perpetuated by the majority of Plc banks.

[Gonzo]

This was no link to BoE rates unless BoE was taking in deposits itself and was paying that rate. The link between actual morgage rates was between cost of capital - savers or LIBOR.

Sigh.

There is a link - this is through the market.

Banks raising the money for lending from savers set the rate they pay themselves, in competition with each other. To remain competitive, the rates set will track the BofE rate. A bank could offer savers double the BofE rate, but then they would have to charge their borrowers considerably more than other banks, in which case they would not get any borrowers and this arrangement would be unsustainable.

Banks raising the money for lending through the money markets pay LIBOR. LIBOR will track the BofE rate in a competitive market - but there could be circumstances, such as we have currently, where the participants don't want to play this game and take their ball away, or demand significantly higer returns for providing that ball.

The Bank of England does not need to take deposits - it can of course create money out of thin air. It can also lend to banks, but the price has always been set "above market", because that is not really what it is for.

[AtW]

There is a link - this is through the market.

If BoE is not actually on the market offering the money at the rates that it sets then there is no link - only recently BoE started giving big loans to banks using securities from them like bonds and even morgages now, however this carries penal interest rate levels.

Banks raising the money for lending through the money markets pay LIBOR. LIBOR will track the BofE rate in a competitive market

But why would it track it fundamentally if there is no direct link such as BoE offering such funds at the rates that it sets? Fact is that there is no (and I think never was) a direct link - it was just an assumption used many times by politicians but in this crisis it failed - it is clear now that BoE rates are more or less meaningless because they no longer even reflect real world inflation.

The Bank of England does not need to take deposits - it can of course create money out of thin air. It can also lend to banks, but the price has always been set "above market", because that is not really what it is for.

Exactly what I am saying - that's why there was no direct link between those rates and commercial bank rates.

[Gonzo]

Exactly what I am saying - that's why there was no direct link between those rates and commercial bank rates.

I suspect this is where we differ on the language.

When you say "direct link", I suspect you are expecting to see a "command and control" type mechanism and can't see one (because there isn't one).

When I say "direct link" I mean that I can see the BofE actions moving the market. Which they used to do, but the issue now is that the banks have started playing in a different market, which the BofE actions have less influence over.

[AtW]

When I say "direct link" I mean that I can see the BofE actions moving the market.

That's not a direct link - it's just a long-time observation, assumption.

When you say "direct link", I suspect you are expecting to see a "command and control" type mechanism and can't see one (because there isn't one).

Direct link would be if BoE was offering unlimited funds in sterling at the rate it sets - this would mean that any bank could loan up that money at the published rate and then use it for morgage. In this case the link will be direct and it would be straightforward, however BoE does not lend like this - the only lending is effectively emergency at much higher interest rate.

There is no direct link with BoE rates - maybe in the past some years ago it was lending directly (and in some countries central banks do just that), but not right now - all the past was just bad assumption that should have never been made: it amazes me how banks pay lots of money for risk analysis and nobody was spending any time building proper stress testing models and plans for proper responses, shocking mismanagement that is.

[Purple Dalek]

I agree with Nationwide - they are standing up for what their members want, and can afford to take this stance because they did not overextend in the crime spree perpetuated by the majority of Plc banks.

Ho ho ho. So they defied the government in the ramp up the bubble, and now they're defying the government on the ramp down. Don't worry, once they've had a "windfall tax" to help out the credit crunched little nurses and hard-working families, they'll realise how fair it is.

Remember you read it here first.

[Doggy Styles]

I agree with Nationwide - they are standing up for what their members want, and can afford to take this stance because they did not overextend in the crime spree perpetuated by the majority of Plc banks.

What happens when the government orders its semi-nationalised banks to reduce lending rates? Those banks will have to reduce savers rates too, and they'll lose most of their savings business, i.e. their funds, to the likes of Nationwide. They'll be f***ed.

[Cyberman]

What happens when the government orders its semi-nationalised banks to reduce lending rates? Those banks will have to reduce savers rates too, and they'll lose most of their savings business, i.e. their funds, to the likes of Nationwide. They'll be f***ed.

HMG will just lend them more money !!

[AtW]

What happens when the government orders its semi-nationalised banks to reduce lending rates?

Govt charges ridiculous rates for the money given to those banks - no way in hell they drop it and Brown won't drop his sneaky interest rate (read tax).

[Doggy Styles]

Govt charges ridiculous rates for the money given to those banks - no way in hell they drop it and Brown won't drop his sneaky interest rate (read tax).

I see what you mean, but the government are currently moaning that the populist mortgage rate cuts that they envisaged are not happening.