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Tuesday, 4 November 2008

The twits in parliament

I was left speechless by the ignorance of parliamentarians. Reducing the discount rate may influence the interest rate environment, but it doesn't mean that banks can drop the rate on their assets by the same amount.

The discount rate is the rate at which private banks (meaning all those in Great Britain other than the Bank of England) will discount bills of exchange for account of the owners or last indorsers, and this discount is governed by the Bank of England discount rate, and also by the supply of bills in the market for discount, but, except under unusual conditions, the private discount rate will always be about 0.25% below the Bank of England official minimum discount rate. Banks reduce their cost of funds when the discount rate goes down but only to the extent directly that their is an adequate supply of bills of exchange.

Equally the discount rate represents a cap on the rate that commercial banks in the London Discount Market will be earn on their overnight cash and short term call deposits placed with discount houses.

This has nothing to do with the interest rates on mortgage loans that have been securitised or which are linked to LIBOR funding, where the funding cost will only reduce to the extent that relevant LIBOR (3/6/12 months) or long term interest rates do likewise.

Similarly, banks are hardly likely to drop the rate at which they lend many hundreds of billions to the public just because the Bank of England drops the rate at which it will accept several billions of short term deposits from discount houses. That can only happen if the whold market moves downward, which is outside th control of any individual bank, or even of the government.

It is bad enough that they talk about these things when they know or understand so little. The shame is that it is the taxpayer (mostly banks) who has to pay for it.

Pass on rate cuts, MPs tell banks

Lord Mandelson urged banks to cut interest rates while visiting the Gulf
The Bank of England's monetary policy committee has been urged by a group of more than 20 MPs to cut interest rates when it meets on Thursday.

They have also tabled a motion in parliament urging all UK banks to pass on benefits to customers.

The MPs, led by Labour's Jim Sheridan, said the benefits of previous cuts had still not been passed on to consumers.

They acted after Business Secretary Lord Mandelson said the public would be "surprised" if no action were taken.

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