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A question of money: Can Stormont act on banks' interest rates?

Published 22/02/2010

Question: The current Bank of England base rate is 0.5%, supposedly so the economy can recover. How can this help local business when banks charge them ten times this? Can nothing be done by Stormont's politicians to ensure the low Bank of England rate is enforced?

Answer: There is no obligation on high street banks to lend money at the Bank of England base rate — and, as you suggest, none at present lends at anything like 0.5% to either businesses or consumers.

In theory competition between banks drives down the rate of interest. But banks have had to increase the amount of capital they hold and competitive pressures on lending is very weak. Banks are also influenced by the fear of high levels of bad debts.

In any case, savings rates and inter-bank lending rates (which are slightly above the base rate) are more relevant than the base rate in determining lending rates, as these determine the banks' cost of money. Many savings rates offered by the banks and building societies are low at present, but the best are far above the base rate.

The State Bank of India is offering a savings product paying 5.25% and Nottingham Building Society pays 5.01% on its regular savings plan.

Stormont politicians have little influence on banks' lending practices, or their interest rates. The British Bankers' Association insists that banks are making loans available to businesses and consumers.

Belfast Telegraph

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