More rate hikes likely without wholesale move

NATIONAL Irish Bank will not raise the cost of borrowing on mortgages in the foreseeable future, it said, after posting substantial first half losses.

It is part of Danske Bank in Denmark, one of the strongest and best funded banks in Europe, which can borrow at competitive levels to fund its lending.

For that reason its deputy chief executive, Kevin Gallen, said NIB was able to cope without having to raise its mortgage rates.

It had been anticipated that NIB and KBC Bank would follow AIB’s rate hike decision on Monday to reduce the losses being suffered by banks due to the high cost of funding in the wholesale money markets of Europe.

At the end of March 2010, when AIB first raised its variable rate by 0.5%, the bank said it could no longer continue losing money on its loans.

Last week, chief executive Colm Doherty made that point again, warning if the bank continued as it was it would go out of business.

He confirmed though that no further increase in rates would be made this year, provided the ECB kept rates on hold at their historic lows of 1%.

Looking at the bigger picture Mr Gallen suspects it will be well into next year before the ECB has to raise rates, leaving trackers untouched in the meantime.

Because of the poor credit rating of Irish banks caused by their virtual collapse in September 2008, banks here are continuing to have to pay more to fund their own debt.

Their exposure to the tracker segment of the market is a major problem because the rate is linked directly to ECB interest rates.

For that reason experts warn that further rises in the cost of mortgages and lending generally are on the cards unless there is a dramatic improvement in the wholesale money market in the meantime.