Banks told to cut interest rates or law will force you
Published 20/05/2015 | 02:30
Banks have been warned the Government will bring in legislation to force them to cut "exploitative" variable mortgage interest rates.
The head of the Central Bank, Patrick Honohan, has flatly told lenders to lower rates for 300,000 homeowners.
"Their boards and management need to recognise that charging spreads that excessively exploit the current weak competitive environment risks being counterproductive if they bring down upon themselves Government policy reactions," Mr Honohan says in a report compiled for Finance Minister Michael Noonan.
The report is being used as leverage by Mr Noonan, who is holding a meeting with the bosses of the State's main banks this week.
It tells the banks that a failure to cut rates will:
- weaken the recovery;
- leave the Government with no option but to "interfere" in banking by capping variable rates;
- diminish banking competition and damage the long-term prospects of the banks.
The uncompromising language used by the Central Bank governor leaves little wriggle room for the lenders to avoid reducing rates.
Now the expectation is that there will be a series of 0.25pc cuts across the six main lenders.
Over a number of months, cumulative cuts of around 0.5pc, and up to 0.75pc, could be delivered.
Mr Honohan was asked to compile the report by Mr Noonan amid huge controversy over punitive variable rates charged to mortgage holders.
Variable rate borrowers in Ireland are paying around €350 a month more in interest than in other EU countries.
Most variable rates here are between 4.3pc and 4.5pc, compared with tracker rates of around 1pc. Over a year, it costs up to €6,000 in interest payments for a variable compared with a tracker mortgage.
The Honohan report refers to "higher than necessary lending rates" and warns that such rates will act as a drag on economic recovery.
It states that Government moves to "interfere with the rates charged risk creating damaging side-effects".
"Such measures would also damage the long-term prospects of the banks."
And there is a specific warning to the boards and senior management of the banks about exploiting the lack of competition in banking here to charge sky-high rates.
"In addition, each bank must deal fairly with its customers in regard to the interest rates charged.
Greater transparency surrounding the variable interest rate policies operated by each bank would help in this regard," the report says.
Yesterday, Mr Noonan met bankers from AIB, Ulster Bank and ACC Bank and shared the contents of the Honohan report with them. Meetings are now to take place with Bank of Ireland, Permanent TSB and KBC Bank.
Financial experts said the language in the Honohan report was unusually uncompromising for a central banker, even if Mr Honohan is regarded as more outspoken than others in senior State positions. He is essentially telling the banks that they have no choice but to agree to cut rates.
Otherwise, the Government will bring in legislation to cap what can be charged, in a move that would be damaging for all banks here and for the financial sector.
One person familiar with the situation explained that Mr Noonan fully expects a series of cuts from the six main banks he is meeting, with the first cuts in the coming weeks.
"The minister is wily enough not be calling in the banks if he did not know what the outcome would be. He would have scrutinised the situation to assess the outcome before he did it," the source said.
A number of 0.25pc cuts are expected from each bank, in a move that could see variable rates fall to around 3.5pc.
Such a move would see a family on a €250,000 mortgage at 4.3pc at the moment saving €1,300 a year.
When AIB, which includes EBS, said last month it was reducing rates for the second time in six months, Mr Noonan responded that this was only the start of a rate reduction process.
Backbench TDs are coming under huge pressure, particularly from those who have a mortgage with Permanent TSB, to force variable rates down.
Meanwhile, Fianna Fáil finance spokesperson Michael McGrath said Mr Noonan must deliver a strong and forceful message to the banks on the exorbitant standard variable mortgage rates they are charging.
Mr McGrath said it is well past time the minister called a halt to the rip-off of variable rate mortgage customers by the banks.