Central Bank boss against forcing lenders to cut rates
Forcing banks to cut interest rates is not a good idea, Central Bank governor Patrick Honohan has said emphatically.
Professor Honohan's comments are the first public response from the independent Central Bank since Finance Minister Michael Noonan last week sent a strong message to the main banks that they face a penal levy if they fail to cut variable mortgage interest rates. Variable rates in Ireland are 4.27pc, almost twice as high as the eurozone average.
But Prof Honohan said obliging banks to cut variable mortgage rates would only bring lower rates for several months. Thereafter, all customers would suffer in the longer term because bank services and charges would not improve overall.
"Well-capitalised banks operating more competitively will, in the end, offer lower rates and better service," Prof Honohan said.
The Central Bank governor was answering questions at the Oireachtas Finance Committee, where he conceded rates were higher than a "fair-minded customer" could reasonably expect.
Prof Honohan said he had got responses from all the main banks recently on their interest-fixing policies. He said these responses were not sufficiently clear and he felt it would be a good idea to oblige banks to be more open about how they fix their variable rates.
But he outlined several arguments against obliging banks to lower their rates. He said it would be against the principle of a free economy, which had delivered prosperity to the country over 50 years, while it would also impede bank efficiency.
Forced rate reductions would also discourage more banks to move into the Irish market and compete for mortgage business. This, he felt, was the only long-term answer and ideally he would like to see five or six banks competing.
Prof Honohan encouraged mortgage holders to switch lender to get a better rate.
He told Labour TD Pat Rabbitte that 15,000 customers could save a four-figure sum by switching.
Prof Honohan also told members that the effects of the bank crisis continued to be felt and "cannot be resolved easily or painlessly". He said delay and uncertainty surrounding the resolution of non-performing loans remains a much more acute problem.