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Mervyn King: Rate cut would put building societies at risk

Bank of England governor Mervyn King says the potential impact on building societies’ margins is part of the reason why the Bank of England has deployed quantitative easing rather than cutting interest rates further.

King in front of the TSC this morning
King in front of the TSC this morning

Asked this morning by Treasury Select Committee chair Andrew Tyrie why the Bank had not accepted the International Monetary Fund’s suggestion the UK should consider a rate cut to 0.25%, King said building societies have warned him that this would hit their margins and risked pushing them out of the market.

King said: “Arguments that led us not to go below 50 basis points are still in play. We are concerned we would squeeze the net interest margin, particularly for smaller building societies and that would make their position vulnerable. I do not think pushing out small building societies from the market would be a wise course to pursue.”

Nationwide has in excess of £50bn worth of mortgages on a standard variable rate capped at 2% above base rate. According to its preliminary results, published in April, this is having a £750m “adverse impact” on annual group profits.

Both King and Monetary Policy Committee external member David Miles told MPs the Bank’s QE programme, worth £325bn to date, will in any case have a greater impact than a rate cut.

King says: “A very small cut in base rate will not make a big difference what we have been doing with asset purchases. That is, in our opinion, very much bigger than a cut of 25 or even 50 basis points.”

Miles said there was a question mark over whether a cut in rates would lead to lower costs and better availability of credit or higher demand in the economy.

He says: “Because there is that issue with some building societies and other lenders about it squeezing their profitability I think there is at least a question mark over whether a rate cut would do any good. As long as we have other effective levers, which we do in QE, cutting rates is not the most attractive policy.”

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