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Lenihan won't force banks to pass on cut

THE Government will not force Irish banks to pass on the European Central Bank's 0.5pc cut in interest rates to mortgage holders.

The banks last night refused to commit to passing on the rate cuts to those on standard variable mortgages -- despite enormous pressure from the Financial Regulator, consumer watchdogs, small business groups and the Opposition.

Officials insisted Finance Minister Brian Lenihan would not intervene -- despite the unprecedented €400bn bailout of the banking sector made on behalf of taxpayers last week. "At present, the department does not give instructions to the banks," a spokesman told the Irish Independent.

Homeowners who have tracker mortgages, which are set at an agreed rate above the prevailing ECB base rate, will get the benefit of the reduction.

However, those on variable rates will be at the mercy of the banks.

Most mortgage holders should have been looking forward to savings of up to €90 a month after the ECB joined the US Federal Reserve, the Bank of England and Swiss, Canadian and Swedish banks in a surprise co-ordinated cut in a desperate attempt to stem unprecedented global market turmoil.

America's Fed cut its key federal funds lending rate by half a percentage point to 1.5pc and lowered its discount rate by the same amount to 1.75pc.

The ECB said it would cut its key rate by a half-point to 3.75pc, with the Bank of England also cutting by 0.5pc, taking its rate to 4.5pc.

The cut in European rates follows nine consecutive interest rate increases.

It will mean that someone with a €300,000 tracker mortgage will enjoy a fall of €120 a month in repayments.

It is the first time in more than five years that European interest rates have come down.

The ECB cut will take effect next Wednesday, the day after the Budget.

However, despite the €400bn State bailout, most Irish banks last night refused to say whether they would pass on the rate reductions to consumers and businesses.

Consumer watchdogs and small business groups reacted angrily.

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The Financial Regulator warned the banks: "Insofar as banks' cost of funding is reduced, we would expect, in a competitive market, that this would be passed on to customers."

The Consumers' Association insisted that the bailed-out banks owed it to consumers to pass on the cut.

"We're all suffering, but we have given them a lifeline and they must pass on this to us," its chairman, James Doorley, said.

Small-business lobby group ISME called on the Government to intervene immediately to stop banks "profiteering" . It said many companies were struggling to meet loan repayments in the recession.

However, officials in the Department of Finance last night dashed hopes the Government would intervene to force the banks to pass on the interest rate cuts to customers.

Sources said the minister will be in a position to issue certain commercial directions to banks over the coming weeks, when the exact details of the State guarantee scheme are finally worked out.

However, the Irish Independent understands it is still highly unlikely the minister will issue instructions to the banks at that stage on interest rates on the grounds it would be seen as interference in the market.

Fine Gael enterprise spokesman Leo Varadkar said banks would save €1.3m every day that they failed to pass on the lower rate.

The dramatic move by the world's central banks failed to halt the sale in share prices. After a brief rally, share prices resumed their falls.

The Dublin market tumbled a further 7.4pc yesterday. Several banks contacted yesterday said the rate reduction would be passed on next month for existing customers who have ECB tracker mortgages.

But most banks said no decision had been taken on whether to cut standard variable rates.

The exemptions were AIB and Halifax and Bank of Scotland (Ireland), which said they would pass on the ECB cuts to their customers.

Standard variable rates have become key, as most banks no longer offer ECB-based trackers. Bank of Ireland and its subsidiary ICS Building Society are set to remove trackers for new customers from tomorrow.

This will leave just AIB and NIB offering tracker mortgages.

A number of economists said last night they now expect more rate cuts from the ECB.

Austin Hughes of IIB Bank said he expects rates to fall to 3pc next year, while Ulster Bank's Simon Barry said he expects more reductions in the coming months.

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