Quoted bank interest rates on mortgages and household savings products were mostly lower again in February, partly reflecting the continuing impact of the Funding for Lending Scheme (FLS). Falling bank rates and exchange rate weakness are delivering a further loosening of monetary conditions when money growth is at a five-year high, arguing strongly against more QE.

Since June 2012, before the July announcement of the introduction of the FLS, the average quoted rate on a two-year fixed-rate mortgage at a 75% loan-to-value ratio (LTV) has fallen from 3.74% to 2.87%, a decline of 87 basis points (bp). 90% LTV mortgages have cheapened by 112 bp over the same period, while the interest rate on two-year fixed-rate savings bonds has dropped by 100 bp – see chart.

Declines in advertised rates on new variable-rate products have been smaller but still significant: two-year 75% LTV mortgages have cheapened by 49 bp since June, while the average rate on instant-access deposits including a bonus has fallen by 52 bp.

Lower funding costs, however, have yet to filter through to existing borrowers on standard variable rates – the average SVR has risen from 4.22% to 4.40% since June. This suggests that banks are cutting interest rates on new mortgages in order to generate enough demand to keep their loan books stable – necessary to obtain FLS funding on the cheapest terms – while widening margins on their business with “trapped” SVR borrowers.

In other UK news, industrial production fell by 1.2% in January, reversing a 1.1% December gain. Bad weather is likely to have played a role and, even assuming no rebound, the implied drag on first-quarter GDP is tiny – January production was 0.5% lower than the fourth quarter average while industry accounts for only 15% of whole-economy output, giving a negative GDP impact of 0.075%. There is currently no hard data on early 2013 performance of the services sector, which will drive the first-quarter GDP result*.

*At the risk of repetition, non-oil GDP adjusted for the Olympics rose in the fourth quarter so a first-quarter decline would not imply a “double dip” in the onshore economy. As previously discussed, an earlier onshore double dip was revised away in GDP figures released last month.