Borrowers are close to the eye of a perfect storm with debt markets at the moment.

For a long time now the mortgage squeeze has increased the cost of borrowing money. These costs have already been passed onto the borrower.

Now the threat of an inflation explosion has forced central banks to increase official rate, dealing yet another blow to mortgagees. Earlier today the European Central Bank (ECB) had increased the official rate from four per cent to 4.25 per cent, after an inflation figure revealed this week of four per cent basically forced the central bank’s hand.

But it is not just the current inflation rate the concerns the European bank as higher costs are expected to keep upward pressure on the inflation rate for some time yet.

Finally inflation has been given the respect it deserves, and while many argue that rising interest rates will not lower inflation, it is a fundamental principle that taking money out of the economy will cool demand, even for oil, and this in turn will help to rein in inflation.

There is no denying it that this is a perfect storm for homeowners as more and more struggle with their budget. If this trend continues for the rest of the year expect the number of defaults on mortgages to rise substantially.

If there is any clear sky it is for the savers. With the higher cost of money, people with savings are able to find rewards with high interest term deposits and savings accounts.

Bank customers may have seen a change in their favour as a major UK bank reduces fees.

According a release earlier this week Barclays is offering customers an overdraft penalty of only £8.

Barclays’ managing director of current accounts Mark Parsons said the fee cut was simply a response to customer’s requests.

“We have listened to our customers and acted on this feedback by completely revamping our unauthorised overdraft service, replacing it with the new Personal Reserve,” Mr Parsons said.

“Our customers wanted a simple, clear way of managing payments when they go beyond agreed limits,” he said.

While this is a win for customers some regulatory groups have said it should have been done years ago, and it was only pressure from the Office of Fair Trade that has lead to this result.

But there might be yet another reason, with the tight liquidity markets finally forcing banks to become more customer focused.

Deposits are in greater demand as money available in the markets continues to be limited.

Banks are starting to reduce charges and increase interest rates to attract cashed-up customers.

Also banks were squarely in the firing line of public criticism as more people are forced to sell up and hand over assets to the banks. These are the same institutions that many people blamed for the economic slowdown in the first place.

By cutting charges for customers banks are once again focused on customer relations and striving for positive publicity.

No matter what the rational the objective is the same, to attract more customers and draw more deposits.

Barclays is the first to reduce charges, but it will not be long before more banks follow.

While the financial world waits for the latest move from the Federal Reserve Bank, it might be a good time to consider the implications for homeowners in the UK.

The fact is that any change in interest rates in the US will have little direct affect on UK homeowners.

It will be the rhetoric surrounding the announcement, which will be closely monitored to find hints as to the health of the US economy.  There is no doubt that the state of the US economy affects every other economy around the globe.

Most of the central banks do a similar dance around monetary policy, but they are all dancing to a different beat.

The US has been lowering interest rates since September last year, the UK started reducing closer to Christmas, while some other central banks such as in Australia have increased their base rate to curb inflation.

When central banks decided to uniting to reduce the impact of the sub-prime crisis it made front-page news around the world.

The banks agreeing to move in the same direction is big news, and not something us investors would expect every day.

Central banks can only create and change policy according to real figures sourced from the domestic economy.

Bankers need evidence and justification for change, if they make changes without the evidence to back it up then hard questions will be asked.

By paying attention to the CPI, employment rates and GDP an investor can have a pretty clear picture of the way interest rates are headed.

Chancellor Alistair Darling wants banks to help easy the credit crunch by passing on rate cuts, but banks will try to resist any weakness to their bottom line.

Historically banks have always been held up as institutions and safe sharemarket investments.

They were a safe haven and immune from financial trouble as they controlled the money. But if this credit crunch has proved anything it is that banks are like any other business.

They are exposed to slowdowns and credit troubles, not only does it increase the levels of bad debt on their book, but it also increases cost with credit markets tightening.

Need we be reminded of the long lines of customers abandoning Northern Rock late last year?

With these conditions there is growing economic pressure not to reduce interest rates to maintain profit margins, even with the base rate in decline.

Darling’s ‘request’ for relief for customers from the banks, will hold little weight with the banks that are seeing their ledgers drained.

Some banks have reduced their interest rate after the Bank of England reduced the interest rate by 0.25 per cent, from 5.25 per cent down to 5 per cent.

But the cost to homebuyers wanting to establish a mortgage has risen, it is the case of giving with one hand and taking with the other.

Darling comments were definitely a warning to banks, after also mentioning the rescue money that the Bank of England and the HM Treasury supplied to stressed banks and financial institutions was a show of goodwill from the government.

But these words are falling on deaf ears as all the attention turns to the US market that shows all the signs of being in a recession, and the banks asking each other how bad this slowdown will hit.

It’s official. The Bank of England and those with control over the purse strings are more concerned about the global economic slowdown than rising inflation.

Earlier this week the Bank of England reduced the interest base rate by 0.25 per cent, from 5.25 to 5 per cent.

This is the third rate reduction in a row, and it is a clear message to the market that central bankers are more concerned about the economic slowdown than increasing inflation.

The central bank expects economic growth in Britain to be around 1.5 to 1.75 per cent, but given the brakes that are currently influencing the economy many commentators believe the bank’s growth estimate is optimistic and a recession is unavoidable.

The central bank believes that a weak economy will put breaks on inflation, and the reduction in interest rates will not contribute to inflationary pressure.

“Even if commodity prices remain at their current high levels, inflation should fall back,” a statement released by the bank stated.

“But to ensure that inflation meets the 2% target in the medium term, the Committee needs to balance two risks.”

Only time will tell if the balance will pay off.

The current environment of record commodity prices and rising inflation (2.5 per cent), with a rapidly cooling economy and tight credit markets is putting up new challenges for economists.

How they deal with these market conditions could re-write the rule book on economic management.

The US is already looking at inventive ways to calm the market, and bring balance back to the economy.

Everyone is feeling the bite of a slowing economy; even banks are finding it tough as funds start to dry up.

According to the Council of Mortgage Lenders (CML) gross lending declined in February to £24 billion from £25.6 billion in January.

This has led many lenders to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending capacity,” CML direct general Michael Coogan said.

Banks are facing higher interest rates to fund their own loan book.

This cost is passed on to the customer.  This begs the question, what influence does the Treasury have against the raging tide of the free market?

The answer is not much.

A bank is like any other business, it must pass costs to its customers to maintain profitability. A bank that doesn’t will suffer in the current economic climate of low consumer confidence and high borrowing costs.

We are seeing the effect of high borrowing costs in other countries. In the US the Reserve Bank is lowering the interest rate but banks cannot follow suit and offer customers the same savings because of the cost of borrowing.

To combat this problem the Reserve Bank is offering cash to US banks to help sure-up their balance sheets.

Central banks are being marginalized by the power of the free market.

So this raises another question. Will higher base rates from the Bank of England help curb the inflation rate? Only time will tell…

There’s been an interesting development in the battle over bank penalty charges.

At the end of July, the Financial Services Authority gave the banks permission to put all refund claims on hold pending the result of a High Court test case.

This won’t be known until next year, but if it goes as campaigners expect, the Office of Fair Trading will order a clampdown on these charges – just as it did with credit card charges (see The costly truth about credit card transfers, below).

Now, out of the blue, Lloyds TSB has announced it’s cutting its unauthorised overdraft charges.

It claims it’s merely responding to requests from customers.

More likely it’s bowing to the inevitable and wants to make some good publicity out of it.

What’s the betting that when its fellow lenders follow suit, Lloyds will be heard reminding anyone who’ll listen that it made the first move and they are only copying its generous action?

The vast majority of current account holders haven’t a clue how much it costs to go into the red.

And millions think – wrongly – that an overdraft is likely to be cheaper than a personal loan.

Even those who have successfully reclaimed bank charges often can’t confirm how much they were made to pay, says MoneyExpert.com.

In fact, consumer organisation Which? has calculated that the UK’s banks made £4.7 billion from unauthorised overdraft fees and penalty interest last year.

The average interest rate for unauthorised borrowing is around 25 per cent.

And there is typically a charge of £20 to £39 each time you go over your limit without permission or a direct debit or cheque bounces.

Yet more than 40 per cent of those questioned by MoneyExpert admitted they had no idea about the fees their bank charged for unauthorised borrowing.

Many others reckoned it would cost less than £20 a time.

More than two-thirds of those who claimed to know their bank’s authorised overdraft rates underestimated these too, saying they were paying between 5 and 10 per cent.

The actual authorised borrowing average is 12.35 per cent – while personal loan rates start at 6.3 per cent.

MoneyExpert chief Sean Gardner says: “While it’s ultimately the customer’s responsibility to avoid going beyond their overdraft limit, banks should make their charging structures more transparent.

“They could also provide a clearer indication of when customers are close to going in the red.”

These are lovely ideas, but with so much money being made from customer ignorance, why on earth would the banks want to change their ways?

There seems to be a new spate of phishing emails landing in email inboxes, so be on the lookout.

A site user reports that over the past few days he has received quite convincing emails supposedly from Halifax, Lloyds TSB and NatWest, all asking him to confirm his account details.

Luckily, he knew that no bank would ever ask for this information by email.

This, and the fact that he isn’t actually a Halifax or Lloyds TSB customer, left him in no doubt that they were fakes.

I’ve had several phishing emails myself, purporting to be from a range of banks, and they were all after the same thing: my bank account details so they could clean me out.

If you get one of these messages, whatever you do, never follow the instructions it contains.

If you can, forward a copy to the bank it claims to be from – as this may help in efforts to track down the fraudsters responsible – then delete the original.

Financial institutions are finding ever more ways to part us from our cash.

Price comparison site Moneysupermarket.com warns: “Brits face running a gauntlet of 112 charges across just five financial products – mortgage, current account, savings product, loan and credit card.”

The site’s managing director Stuart Glendinning adds: “It is unbelievable that five financial products can be the root of so much penalty pain.

“With so many default fees and charges in place, even the most astute consumer can fall foul.”

Mortgages are the worst offenders with a possible 51 different penalty charges, while current accounts have up to 27, credit cards have 19, loans 11 and savings accounts four.

That’s why it’s essential – particularly with mortgages where there are so many ways to get caught out – that you read every word of the small print before you sign on the dotted line.