Banks snap up £15bn as retail sales fall

Apr 16 2008 by Alex Turner, Liverpool Daily Post

Shops gloom drives hopes of new interest rate cut

BANKS once again snapped up all of the wholesale bank funding offered by the Bank of England in its latest auction held yesterday.

The central bank offered £15bn and received offers for £15.15bn from lenders who are suffering from the credit crunch.

However, unlike the previous auction last month – when the Bank of England received bids totalling £16.9bn for £10bn of funding – lenders received almost all of the money they were seeking.

The central bank has lifted the funding available to borrow for three months to £15bn this month, with financial institutions still reluctant to lend to each other following the credit crunch. The rate at which banks lend to each other for three months is almost 1% above the Bank’s official 5% base rate.

The Bank of England figures showed some financial institutions more in need of the money than others, with the highest bid for the money at a rate of 5.84%, compared with an average of 5.25%.

This is particularly high because the money is to be lent for three months and markets are currently expecting another cut in interest rates to 4.75% by June.

The lowest bidder for the funds, who bid below the Bank’s current 5% base rate, received nearly 90% of the cash it demanded.

The identities of those taking part in the Bank's auctions are kept secret to avoid concerns spreading through stock markets. Banks could bid for maximum of 20%, or £3bn, of the funding on offer.

Central banks across the world have made increasing efforts to address the credit crunch in recent months by making more cash available to banks.

The Bank of England warned of “worsening conditions” in credit markets last week as it cut rates.

The higher borrowing costs have fed into more expensive mortgage deals for many homeowners, despite three rate cuts in five months from the Bank of England.

Prime Minister Gordon Brown yesterday held talks with bank chiefs at Downing Street to urge them to pass on the cuts to hard-pressed customers.

And the likelihood of further interest rate cuts has increased this week after March retail sales figures sparked fears over the health of the high street.

The latest figures from the British Retail Consortium (BRC) revealed that like-for-like sales fell by 1.6% in March in the first monthly fall for nearly two years, despite the earliest Easter for almost a century.

Gloomy comments over the outlook from department store chain Debenhams and JD Sports parent John David Group added to concerns over the sector’s prospects as consumers rein in spending.

Supermarket giant Tesco provided a glimmer of hope as it said sales rose more than 4% in recent weeks on unveiling an 11.8% hike in annual profits.

But the retail giant admitted that trading conditions were challenging and set to remain that way this year.

Experts said the depressing BRC figures provided yet more evidence that the economy is heading for a slowdown, putting pressure on the Bank of England to trim rates again by another quarter point sooner rather than later.

David Page, economist at Investec, said that adjusting for the early Easter, the results of BRC’s March survey were “horrifying”.

“While the Bank of England may have been expecting a housing correction given the boom seen for most of the last 12 years, it will perhaps be more worried by the recent readings from the British Retail Consortium,” he said.

“This could be the first materialisation of some of the downside economic risk the Bank of England has been warning about.”

The BRC’s quarterly sales measure showed like-for-like sales at just 0.8% ahead of the first three months of last year.

BRC director-general Stephen Robertson said: “Here is the strongest evidence yet that customers are making serious economies and are increasingly concerned about the future.

“It’s clear customers are concentrating on essentials.”

But consumer confidence is being jolted by a slowing prop- erty market while soaring food, petrol and household energy bills have also hit sentiment.

Many lenders hit by losses from the credit crunch are failing to pass on the interest rate cuts in full and even raising the cost of fixed-rate deals, adding to the pressure on households looking to remortgage.

alex.turner