Interest rates for riskier borrowing have “skyrocketed” to multi-year highs during the pandemic, raising pressure on the Bank of England to intervene to keep costs at low levels.
Economists warned that the Bank’s rate cuts were failing to feed through to some borrowers after a surge in costs on overdrafts and mortgages deemed more risky.
Threadneedle Street’s policymakers may need to intervene after the darkening economic outlook and retreating risk appetite caused rates to rise sharply for the borrowers, economists at Deutsche Bank said.
The average interest rate on overdrafts for households has “skyrocketed” 10 percentage points since February, while costs have surged to their highest level in years on high loan-to-value mortgages, rising as much as 140 basis points.
The Bank slashed rates to a record low of 0.1pc in March and took more action to fight the economic fallout of a second lockdown on Thursday, announcing a £150bn boost to its quantitative easing programme.
But Sanjay Raja, Deutsche UK economist, explained the latest policy tweak “won’t solve the rise in mortgage rates and overdraft fees”. He said: “This is a credit problem, stemming from lenders’ fears of defaults, a worsening economic outlook, and increased pressure on banks’ balance sheets as a result of the £60bn handed out via [the loan guarantee schemes].”
Mr Raja warned the issue will continue “unless the Bank takes action on the credit side of things”.
He said its policymakers could follow the lead of the European Central Bank and cut fees on the Term Funding Scheme, which allows lenders to access funding from the Bank at very low costs to keep credit flowing to the economy.
A further reduction to the Bank’s base rate would “largely be absorbed by lenders”, rather than easing credit conditions for borrowers, he argued.
A Bank of England survey found lenders were bracing for a sharp rise in mortgage defaults in the fourth quarter.