British minister urges banks to pass on rate cuts

By Kate Kelland

LONDON, Nov 4 (Reuters) - Britain's business minister Peter Mandelson urged banks on Tuesday to pass interest rate cuts on to customers as markets are preparing for the Bank of England to slash rates by 75 basis points later this week.

Fifty-one out of 62 economists saw the bank cutting rates by at least 50 basis points, in a Reuters poll last Thursday.

Mandelson said the government had "strong expectations" that the banks should respond appropriately to the steps the authorities have taken to ease the credit crisis, such as offering cash injections and cutting official interest rates.

"We are taking very strong action as a government," he told BBC radio. "People want to feel the benefits of that action. And if it appeared that the banks were standing in the way ... then I think many banking customers are going to be asking some difficult questions of the banks."

Mandelson was responding to comments by David Hodgkinson, the chief operating officer of HSBC (HSBA.L), Europe's largest bank, who said on Tuesday there may be some "stickiness" by banks in passing on an expected rate cut by the BoE on Thursday.

Some British banks and building societies have recently been bolstering profit margins on mortgage products and failing to cut headline rates, sparking concern in some quarters that falls in official interest rates will have a limited impact on the moribund housing market.

Mandelson said all banks were in a "sticky position" in the midst of a global credit squeeze which has brought many financial institutions to their knees, but said they had a responsibility to help get through it.

The government offered to inject 50 billion pounds into banks and guarantee new short- and medium-term debt issuance in its recapitalisation plan at the beginning of October.

"We had strong expectations, which we made clear to the banks, of review lending to mortgage holders, to small businesses as interbank lending and confidence grew and liquidity kicked in," Mandelson said.

The BoE made an emergency 50 basis point rate cut on October 8 and markets are pricing in a 75 basis point rate cut at its regular monthly monetary policy decision meeting on Thursday in an effort to soften the impact of the credit squeeze and stop the UK economy from heading into a deep recession.

Britain's economy contracted in the third quarter for the first time in 16 years and many analysts expected it to shrink further in the fourth quarter and head into an official recession in 2009.

Mandelson admitted the government could not force banks to ease lending conditions for their customers, but said: "Everyone would be surprised and disappointed if the banks in time were not to respond." (Editing by Sumeet Desai and Tony Austin)