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Banks pass on elevated funding costs to borrowers
Lenders tell the Bank of England that they expect borrowing costs to rise further in the coming months.
Banks expect to continue to face high funding costs in the coming months, which they’ll pass onto mortgage borrowers and companies even as the base interest rate remains at rock bottom.
According to a survey of lenders conducted by the Bank of England, ‘the elevated cost of wholesale funding for banks has continued to be passed through to spreads on secured household lending, and lending to firms’.
Lenders responding to the Bank’s survey between 14 May and 31 May – before the Bank and Treasury announced new funding operations to boost lending – said the difference (spread) between the rates people pay on their mortgages would widen further from the bank base rate, which is expected to stay at 0.5% until at least 2014.
They said the availability of credit to households had remained unchanged, compared with the previous survey expectation of a slight fall. The availability of mortgages on high loan-to-value ratios, meanwhile, will 'decline markedly'.
Spreads had also widened ‘significantly’ on loans to struggling medium-sized firms. Small firms saw a lesser increase in costs, while they were unchanged for large firms. Over the next three months though, lenders said they expected spreads to rise ‘markedly’ on lending to firms of all sizes, and other financial corporations.
A ‘funding for lending’ scheme announced by the Bank of England’s governor Mervyn King after the survey was conducted will provide commercial banks with loans below market rates, on the basis that they then increase lending.
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