Lenders plead for rate cut help

The Bank of England is under pressure to cut interest rates soon

Mortgage lenders have made a plea for the Bank of England to cut interest rates to shore up their finances.

The latest report from the Council of Mortgage Lenders (CML) warns that, "funding pressures have started to crystallise for a number of lenders".

It says their ability to borrow from other financial institutions is getting worse, not better.

The CML says the Bank of England should consider cutting interest rates sooner rather than later.

"November's Inflation Report appears to anticipate at least two 0.25% interest rate cuts next year," it says.

"But, earlier and more decisive action may be needed," the CML adds.

Rate cut?

The Bank of England's Monetary Policy Committee meets next week for its regular monthly meeting to set interest rates.

The overall impact is to limit the availability of mortgage credit and to raise its cost for prospective borrowers Council of Mortgage Lenders

Its members may feel that the challenges presented by the credit crisis in financial markets and the problems at Northern Rock mean that it is time to cut interest rates from their present level of 5.75%.

The Bank's Governor, Mervyn King, has already announced that he will make extra funds available to the banking system between now and the end of the year, to ensure that banks have enough cash.

And in the past week two lenders - the Bradford and Bingley and the Alliance & Leicester - have managed to strike deals with other banks to raise billions of pounds in extra funds.

Mortgage tap

However, the CML's commentary points to the possibility of a dramatic shrinkage in the ability of mortgage lenders to lend money next year, if they cannot borrow extra funds in the "still dysfunctional" financial markets.

The CML points out that the public saved an extra £45bn with its members in the past year.

But that is only half the £90bn in extra mortgage lending that it expects to see in 2008.

If that gap cannot be made up by lenders borrowing in the wholesale markets then the mortgage tap may be turned off.

"Firms have various other options, including the ability to influence the volumes of new lending business they write in line with their funding pipeline," said the CML.

"But, the overall impact is to limit the availability of mortgage credit and to raise its cost for prospective borrowers," it warned.