Saturday 22 October 2016

Government cannot force banks to cut mortgage rates – Honohan warns

More banks competing for business is the only way to lower rates

Published 28/05/2015 | 16:23

Patrick Honohan
Patrick Honohan

Forcing banks to cut interest rates is not a good idea, Central Bank governor, Patrick Honohan said today.

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Mr Honohan said obliging banks to cut variable mortgage rates would only bring lower rates for several months. But 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,” Professor Honohan said.

The Central Bank governor was answering questions at the Oireachtas finance committee after strong signals that the Government would act to secure significant cuts in variable mortgage rates which are up to twice the EU norm.

Mr Honohan said he had got responses from all the 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 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.

Professor Hononan also said it would not encourage more banks to move into the Irish economy 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.

Mr Honohan said reasonable people would find variable interest rates too high. But the level of mortgage arrears contributed to this as did other fall-out from the economic crash which had done a lot of damage to the bank system.

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