Nationwide says no if Bank makes interest rate history

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By Rachel Jones
Know Your Money Editor

Nationwide has recently announced that over 200,000 of its customers on tracker mortgages will not enjoy the benefits of a cheaper interest rate should the Bank of England drop the base rate to below two per cent later this week. It is written into the contracts of such mortgages that the building society does not have to pass interest rate cuts on to its customers if it falls below 2.75 per cent - a clause it did not enforce when it fell to two per cent in December. The organisation says it has made the move in order to protect its struggling savers from yet another blow to their accounts.

"Savings rates are at an historic low and this move means we will not be forced into a position where we could have to cut savings rates more aggressively than we would otherwise like to," a Nationwide spokesperson says.

But what does its stance mean for Britons on tracker mortgages? And what will happen if the Bank decides to cut the interest rate further?

Going against the government's message

The decision by Nationwide goes against prime minister Gordon Brown and chancellor of the Exchequer Alistair Darling's attempt to bring banks and businesses in line with any decisions made by the monetary policy committee (MPC).

Commenting on the announcement, a Treasury aide says: "The chancellor has repeatedly made clear that he expects lenders to do their best to help their customers through these difficult times."

Andrew Montlake, partner of broker Cobalt Capital, tells the Times that while borrowers may be disappointed that they are not going to enjoy the benefits of a tracker mortgage - with potential low interest rates one reason for taking one out in the first place - banks and building societies do need to look after their own profits.

And Ray Boulger, from broker John Charcol, highlights that Nationwide has always been clear about its terms and conditions. Indeed, the building society did not enforce its own small print on cash-strapped Brits when the interest rate dropped to two per cent. But this may have led to some homeowners expecting the same treatment if Thursday (January 8th) reveals a further drop by the monetary policy committee.

The interest rate crystal ball

Writing for the Telegraph, Edmund Conway says that many sector commentators are predicting an interest rate cut of 75 basis points, although some are considering a full percentage point drop. However, he questions whether the Bank will take such action - which would see the lowest interest rate in its history. Mr Conway states that a further decline will penalise savers and that like Nationwide, other lenders may decide to freeze the rates on their tracker mortgages, as well as other products on the market.

"I would be surprised at anything more than a 50 basis point cut - though it has to be said in recent months the MPC has made a habit of surprising everybody," Mr Conway states.

Speaking to the Independent, Philip Shaw, UK economist at Investec, claims that the effects of previous interest rate cuts have not come to light yet and so the MPC may drop the rate down to 1.5 per cent only. Furthermore, the value of sterling has fallen, meaning that the Bank may want to keep interest rates at a slightly higher level to counter the effect of this.

But he concludes: "It is possible that the MPC opts for a more aggressive 75 basis points or even 100 basis points move."

So what about other lenders?

One month on from the historic two per cent interest rate decision and how has this impacted the average Briton? A report by Moneyfacts notes that over three-quarters of mortgage providers have announced a cut to their standard variable rate (SVR), while 19 lenders opted to pass the decline on in full. Five lenders still have their SVR at 6.5 per cent or above and include the Darlington, Stroud and Swindon, Market Harborough, Kent Reliance and Chesham building societies.

"Some building societies are opting not to cut their SVR so they can offer higher rates to their savers. However, the three lenders with the highest SVRs have all cut savings rates by more than the base rate cut, with Stroud and Swindon building society cutting rates by up to 2.50 per cent and Kent Reliance building society cutting rates by up to two per cent," Michelle Slade, analyst at Moneyfacts.co.uk, comments.

So it looks like savers and mortgage borrowers alike may have to await the MPC decision on Thursday and see which lenders pass on the cut through mortgage reductions, or decide to help their savers by refusing to follow the direction the Bank takes.

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