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Banks face dilemma as funding costs rise

Mortgage rates are rising because of an upward trend in funding costs.

Banks have inevitably been accused of profiteering by consumer groups and the media, but as businesses, can they really be blamed?

There has been a dislocation between the base rate and mortgage rates for many years.

Mortgage rates are determined by funding costs, which have increased steadily over the past year as the price paid for retail deposits has risen in response to competitive pressures.

Banks are stuck between a rock and a hard place. If they increase rates they get it in the neck for profiteering and slowing down the chances of an economic recovery. More than two-thirds of all mortgage borrowers are on variable rate deals.

If lenders hold rates they take a battering from shareholders for producing a below-par financial performance.

And for a number of the big banks, their primary shareholder is the UK taxpayer.

At the heart of this problem lies the need to raise reasonably priced retail deposits because the wholesale money markets are not operating normally. To address their lending issues, banks need to consider the needs of savers, so for some the answer lies in launching savings products and services.

But banks’ potential to offer attractive savings and mortgage rates will also be affected by their ability to control costs.

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