Claims that banks have taken advantage of the low level of Bank rate to widen interest margins and boost profits continue to be contradicted by Bank of England data on deposit and lending rates.
The chart shows estimates of the weighted-average interest rates paid on sterling deposits and charged on sterling loans vis-à-vis the UK non-bank private sector (i.e. M4 deposits and lending). The average deposit rate has been rising gradually since early 2010, probably reflecting banks competing to attract inflows to replace maturing funding, such as borrowing enabled by the special liquidity scheme.
The average lending rate, by contrast, fell during 2010 and has stabilised in recent months despite the rising cost of deposit funds. The lending / deposit rate spread, therefore, has fallen to a new low in data extending back to 1998. Bank bashers please note.
A cut in Bank rate from 0.5% to 0.25%, as recently suggested by the Ernst & Young Item Club, could intensify the squeeze, with funding pressures making it difficult for banks to lower deposit costs sufficiently to compensate for the reduced yield on tracker mortgages and other loans linked to official rates.
