Economic Myths: UK banks face "soaring" funding costs

From The Daily Mail:

Homeowners should brace themselves for sharp increases in the cost of their mortgages, the Bank of England warned yesterday.

It is a bitter blow for Britain’s 11.2million mortgage holders and comes as a direct result of the chaos in the eurozone. The crisis is driving up the cost of borrowing for high street lenders in this country – and they aim to ‘restore’ their profit margins by passing on that cost...

??? Historically, in the UK (and I would guess in most countries), the normal 'spread' is about 2%, i.e. banks charge borrowers 5% and pay depositors 3%, and this is exactly where we are now!

This chart (from Money Moves Markets) shows that the spread actually has drifted downwards from 3% to 2% over the past decade (see footnote), and continued to narrow ever so slightly over the past two years, but it's nothing dramatic, and I read recently that this had ticked up slightly to about 2% again anyway:Banks have been pushing this propaganda about "imminent rate hikes" for years, I assume that this is because they are trying to stampede people into remortgaging from very low variable rates onto a higher fixed rate, it seems that the stoic British borrower has completely ignored this - the article says that out of 11.2 million mortgage borrowers, 8 million are on a variable rate, and that over four million are interest-only mortgages (let's assume that most interest-only mortgages are variable rate).

Footnote: And why did the spread drift down over the last decade? Because of the credit bubble, i.e. the banks went for volume of lending rather than quality (it being far easier to justify bumper bonuses on the basis of big numbers on the balance sheet than by pointing out that in future, the bank would suffer very few defaults), and to increase volume you have to reduce interest rates charged as well as lending standards. Back to text.