UK banks are facing a profit-squeeze because of the sharp drop in rates engineered by the BOE and pressure from Her Majesty’s Treasury to pass along the rate cuts to consumers. Any UK recession may be shorter as a result of the drastic rate cut but net interest margins (profits) will be crimped.
Sandy Chen, banks analyst at Panmure Gordon, added that the rate cut will also slash profit margins on current account deposits, which tend to be free funding for the banks by paying minimal interest.
He said: “When rates come down this quickly, you see a shrinking of net interest margins, which is normally compensated by a surge in lending levels. We don’t expect that this time. As a result, we think there will be an impact on profits.”
