Why doesn't my mortgage fall when bank rates do?

In the current economic climate, the decisions made by the MPC's monthly meeting are closely watched by us all. However, in practice few mortgage lenders pass on the full amount of any cut in interest rates which is made.

Mortgage lenders have been stubborn in their refusal to drop rates as their cost of obtaining funds in the wholesale money markets, which have become increasingly important as a source of funds, remains high.

The rate which counts for mortgage lending is LIBOR (the London Interbank Offered Rate) and is the rate of interest at which banks borrow funds from each other in the London interbank market.

LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. This reduced from about 6. 3 per cent at the beginning of October to just under 6% by the end of the month. This suggests that banks are a little more ready to lend to each other although the cost remains way over bank base rate at 4. 5%. Indeed, when base rates fell last on 8 October, LIBOR hardly budged.

The challenge for the Bank of England is to encourage lending between banks and create a stable environment where there is a sustained reduction which can then feed through into lower interest rates.