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Last Updated: Wednesday, 12 September 2007, 17:09 GMT 18:09 UK
Abbey blames rate rise on markets
Abbey branch
Abbey expects its rivals to follow suit
Abbey has become the first UK High Street bank to raise its mortgage rates as a direct result of the continuing turmoil in the financial markets.

The lender raised interest rates of its tracker mortgages for new customers by between 0.1% and 0.2% in response to current "market pressure".

Rival groups Standard Life and Halifax soon followed suit.

Bank of England boss Mervyn King warned that both homes and firms should now expect higher mortgage and loan rates.

We have seen significant changes to the money markets...and this has increased the cost of borrowing internationally
Standard Life

However, in a paper to the Treasury Committee, Mr King added that it was "too soon to tell how persistent and how large any change in credit conditions for household and corporate borrowers will prove to be".

Yet he concluded that if managed properly, then the current credit turmoil "should not threaten our long-run economic stability".

'UK market volatility'

Higher mortgage rates and loans are now likely across the board because the current global credit shortage has made it more costly for UK banks to borrow funds.

Bank of England governor Mervyn King
Mr King does not want to bail out risky lenders and heavy spenders

"These changes reflect moves in the market that have been experienced," said Abbey's head of mortgages Nici Audhlam-Gardiner.

"We expect that these current trends will be sustained over a significant period and that other companies will follow immediately."

Standard Life, which made its announcement just hours after Abbey, said it was repricing a range of its mortgages as a result of "the current UK market volatility".

"We have seen significant changes to the money markets in the last few months and this has increased the cost of borrowing internationally," said Standard's sales and marketing director, Allison Crawford.

US centred

The global credit squeeze has centred on the crisis in the US sub-prime mortgage sector, which specialises in higher risk home loans to people with poor credit histories, or those on low incomes.

As US mortgage rates have risen sharply over the past year, the sector has seen record levels of loan defaults.

The reason the crisis has spread beyond the US sub-prime sector, and across the Atlantic, is because such sub-prime debt has usually been resold around the world as part of a wider debt package.

As a result, some UK banks may have directly lost money, meaning they have had to stockpile funds to cover any liabilities.

Mr King reiterated in his comments that the Bank of England - unlike the US Federal Reserve or European Central Bank - would not bail out any lenders that have allowed themselves to become too exposed to the problem.

He said this would wrongly penalise the more prudent banks, and mistakenly encourage excess risk-taking again in the future.

In addition to those UK lenders directly exposed to the US sub-prime crisis, other British banks are now unwilling to lend money until the full impact of the situation is known.

All UK banks are also finding it harder - and more expensive - to secure their usual investments from insurance and pension funds.

The combined result is that lenders are facing a squeeze on their day-to-day cash flows, with the rising cost of household mortgages being an almost inevitable knock-on effect as the lenders need to recoup more cash.

Abbey is a part of Spain's Banco Santander Central Hispano.

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