Brown snubbed over rate cuts as EU warns slump will hit UK hardest

Gordon Brown's attempts to promote himself as the man to lead Britain through the economic crisis suffered a double setback yesterday as banks warned they would not pass interest rate cuts on to customers and the EU said the recession would hit the UK harder than any other country in Europe.

The prime minister had hoped to use the keynote speech of his trip to the Gulf states to restate calls on banks to ease lending conditions for families and businesses after the government intervened to save three of the UK's biggest financial institutions with £37bn of public money. Brown said: "Having helped to strengthen the global banking system through recapitalisation, governments must ensure that the money is used to enable a resumption of lending to families and businesses."

But a senior banker travelling with Brown's party, David Hodgkinson, chief operating officer at HSBC, overshadowed the speech by suggesting that banks would not make mortgages cheaper even if, as expected, the Bank of England cuts interest rates on Thursday.

Speaking to reporters in the Gulf, Hodgkinson said: "Clearly if interest rates are down significantly, the rates for borrowing will go down. But I am not going to say it is absolutely linear, because it depends on the particular [situation] and the risk."

He expected there to be some "stickiness" should the Bank of England's monetary policy committee cut rates.

He later told ITN: "We will do our best but I will not give a categorical commitment that they will come down.

"We would listen. We are in a very, very turbulent position and it's very hard to predict what markets will do."

Hodgkinson was immediately slapped down by the prime minister's official spokesman who said that if official rates were cut, consumers could expect to see full benefits.

A government spokesman said: "The prime minister is very clear that we are taking the action to ensure that more mortgage holders and small businesses feel the benefit."

Though the monetary policy committee agreed an emergency rate cut of half a percentage point last month, only half of banks have cut their standard variable rates. The website moneyfacts.co.uk revealed that 82% of lenders had not passed on in full the last three base rate cuts - a one-point reduction in total - and 57% of lenders passed on half or less of the last three base rate cuts.

The European commission's half-yearly forecast, published yesterday, said Britain will suffer the deepest recession among the EU's mature economies, with a 1% contraction next year and growth of only 0.4% in 2010. It showed UK unemployment rising from 5.3% in 2007 to 7.1% - about 2.25 million people - next year, with the budget deficit and government debt also surging.

Hodgkinson was supported by his own bank, which released a statement saying he was only speaking "common sense". Eric Daniels, the Lloyds TSB chief executive, also backed him. Revealing details of his bank's merger with HBOS, Daniels said there was a "common misconception" about the way financial products were priced and many were not related to the base rate, which the Bank of England sets, but to Libor - the rate at which banks lend to each other.

Daniels also risked fuelling government anger when he said that his merged bank would not expect to have its lending policies influenced by government.

At the same time, Alistair Darling and Bank governor Mervyn King admitted to MPs there had been lapses in bank governance but denied that taxpayers had been "taken for a mug" in the bailouts.

Details of the Lloyds-HBOS merger revealed yesterday raised concerns among unions about the impact on jobs, particularly when Lloyds raised its forecast of cost reductions by £500m to £1.5bn. More than half the promised savings are forecast for the retail banking arm - the branch networks of Lloyds TSB, Halifax and Bank of Scotland - where 21 initiatives are earmarked to save £790m a year by the end of 2011.

There were also questions about the future of the 200-year-old TSB name which is being eradicated from the holding company, which will be called Lloyds Banking Group on completion of the takeover early next year. Daniels said Lloyds would become the "umbrella brand" and other details were still being worked on.

The Liberal Democrat Treasury spokesman, Vince Cable, said it was difficult to see the justification for not passing on the full benefit of any rate cut. "Banks are only too happy to increase the cost of lending when interest rates go up," he said. "For customers to get a fair deal, this needs to be a two-way street."