Fears of higher interest rates after banks downgraded

by Simon Ward on 22 June 2012  |  4 comments
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Four UK banks have had their credit ratings downgraded by ratings agency Moody's, leading to concerns that our borrowing costs may increase.

Ratings agencies Moody’s has downgraded the credit ratings of 15 of the world’s biggest banks, including Barclays, HSBC, Lloyds and Royal Bank of Scotland.

There are fears that the downgrade could lead to higher interest charges for customers as the banks themselves will face higher borrowing costs.

Moody’s says all of the banks “have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities”. Essentially, it’s worried about the impact of the ongoing Eurozone crisis.

However, many analysts believe the impact won’t be dramatic as the banks have already made contingency plans.

Many banks have already increased both the Standard Variable Rates (SVRs) and other interest rates on their mortgages, blaming the increased cost of funding, as Christina Jordan explained in Mortgage rates are going up... and down.

On Wednesday, the banks borrowed £5 million in cheap loans from the Bank of England, which is the first instalment of the Extended Collateral Term Repo scheme. This scheme is designed to get the banks lending more.

There have been calls for the Government to make sure that banks are passing on this cheaper credit to customers, rather than using it to improve their balance sheets. This has been one of the major criticisms of the quantitative easing (QE) programme, where the Bank of England has bought back Government-issued gilts from the banks.

More on banking and the economy

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How the banking reforms will affect our money

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Mortgage rates are going up... and down