Nov. 6 (Bloomberg) -- Prime Minister Gordon Brown's government stepped up pressure on British lenders to cut the cost of loans after the Bank of England unexpectedly slashed its benchmark interest rate to the lowest in half a century.

The central bank reduced its rate today by 1.5 percentage points to 3 percent. Banks including HSBC Holdings Plc have said they're working to rebuild their capital and may not lower borrowing costs in lock-step with Bank of England reductions.

``Banks have to decide how best they pass on this reduction,'' Chancellor of the Exchequer Alistair Darling told BBC television. ``I want to ensure that banks pass the benefit on to people. Banks need to play their part. They now have to help their customers.

After pledging 50 billion pounds ($80 billion) to rebuild the balance sheets of financial institutions, Brown's administration is under pressure to ensure that banks comply with the strings attached to the rescue money. The Treasury wants the industry to return lending levels to 2007 levels.

``The government has been a bit weak on this,'' said Vince Cable, finance spokesman for the opposition Liberal Democrats. ``The banks have entered into several assurances with the government. As far as we can see they're treating those agreements with complete contempt and the government is reduced to pleading.''

Brown's View

Brown believes the Bank of England's rate reduction was ``decisive'' for the U.K. economy and reiterated his call for banks to pass on lower costs, his spokesman, Michael Ellam, told journalists today.

In Britain, banks approved 33,000 mortgages in September, a third of the 104,000 monthly average last year. About 40 percent companies say their overdraft charges have risen from a year ago in spite of central bank rate reductions, according to the Federation of Small Businesses.

Lloyds TSB Group Plc said its customers would enjoy the entire benefit of the Bank of England's rate cut. HSBC, Barclays Plc and the Halifax unit of HBOS Plc said they were still reviewing the matter.

``Building societies will do all they can to ensure that the cost of mortgage borrowing is as low as possible,'' said Adrian Coles, director-general of the Building Societies Association. ``However, the bank rate is just one of the issues that they have to consider.''

Defying Brown

Earlier this week, David Hodgkinson, who is chief operating officer of HSBC, said banks around the globe are re-evaluating the price they put on risk, raising the cost of loans when compared with levels in previous years.

``Credit has to be priced appropriately to reflect the risk,'' Hodgkinson said in an interview in Abu Dhabi on Nov. 3, where he was part of Brown's delegation on a Middle East visit. ``If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear. It depends on the particular transaction.''

Lloyds TSB, HBOS and Royal Bank of Scotland Plc have agreed to take the government's cash in exchange for equity stakes. The Treasury earlier this week said it will manage its holdings in the banks in a ``commercial way,'' though it wants banks accepting funds to cut bonuses and promise to restore lending.

``We really do expect them to pass cuts on now to consumers,'' Yvette Cooper, chief secretary to the Treasury, said on Sky News television. ``Everybody in the country will expect to see those cuts passed on. We are setting up new arrangements now to monitor the banks, and monitor the ways in which they lend. There are obviously very specific arrangements for those banks in which we have shares.''

Leverage on Banks

The government also has nationalized two banks, Bradford & Bingley Plc and Northern Rock Plc, this year. It also offered a line of credit to cash-strapped institutions and worked with the Bank of England to boost liquidity in financial markets.

Asked whether he would use his powers to force banks to lower costs, Darling said it was up to bank boards to decide on individual interest rates for the loans they make.

``Banks have to decide on an individual case on the terms and conditions in which they lend,'' Darling said.

The main opposition Conservatives said that Brown will have to consider further measures to ``unblock'' the plumbing of the financial system if the central bank rate cuts don't reach consumers and small businesses.

``It won't work unless it does actually get to families and small businesses,'' Conservative finance spokesman George Osborne said. ``Today's cut is a shot in the arm. But it's an indication of the seriousness of the crisis.''

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.netRobert Hutton in London at rhutton1@bloomberg.net

Last Updated: November 6, 2008 11:10 EST