Commentary: Why what comes down must go up

Skipton Building Society's decision to push its mortgage rates from the industry average 10.75 per cent to 11.25 per cent looks depressing, not least because the small Yorkshire society has long had a track record of leading the pack. The Treasury's recent policy has been directed towards staving off a rise, even to the extent of twice cutting interest rates on the National Savings instruments that compete for retail savings. Has the Treasury begun to lose its gamble?

Skipton blamed the tardiness of the cuts in National Savings rates and the outflow of retail funds for the need to raise deposit and mortgage rates, and it has a point. The Treasury certainly did not appreciate the damage its aggressive marketing of National Savings was doing to the societies' retail base. Nor did it appear to recognise that an erosion of the retail base would lead to rapid rises in deposit and mortgage rates, simply because the societies are not allowed to raise more than 40 per cent of their funds from the money markets. Hence the bizarre phenomenon whereby Skipton is now offering retail depositors more for a three- month deposit than a bank can get on the money markets.

Nevertheless, Skipton is out on a limb now that Bradford & Bingley has followed Nationwide's example in cutting deposit rates. Skipton's decision was taken before Nationwide's move, largely because of the need to attract large deposits from interest-rate-sensitive savers.

The other societies have more small deposits, which are less sensitive to rate changes. Most societies will be content to take advantage of the cut in National Savings rates to cut the rates paid to their own depositors. This enables them to boost the margin between savings rates and borrowing rates without hitting borrowers.

From the economic point of view, it would be preferable if they could reduce mortgage rates in line with the lower savings rates, but that may be asking too much. After all, the cut in mortgage rates in February and March was not accompanied by a cut in deposit rates, and occurred largely in the hope of a further fall in bank base rates. At some point, normal margins had to be re-established.

The case, though, for the Chancellor attempting to disengage mortgage rates from the rest of the interest rate structure is strong. He could suspend any further sales of National Savings instruments. He could also tell the Building Societies Commission to take a more relaxed view of societies' funding on the wholesale markets. Although a change in the 40 per cent limit would require legislation, the Commission tells societies to keep well within the figure. Some temporary discretion would be well advised.