Central Bank confirms Irish lenders slower to pass on rates to savers 

Figures from the Central Bank of Ireland show Irish savers have been slower to see rate hikes as deposit bases rise and competition falls

The European Central Bank (ECB) is will meet next week to discuss the possibility of an additional hike in interest rates. (Photo by DANIEL ROLAND/AFP via Getty Images)

Irish deposit holders have been largely excluded from Europe's rising interest rate environment, with early evidence from the Central Bank of Ireland confirming that Ireland's transmission of the European Central Bank's (ECB) monetary policy has been "weaker to overnight deposit rates, especially for households."

Published as part of its Economic Letter series, the Central Bank found significant variation across loan and deposit products in Ireland compared to the euro area, with both business and household overnight deposits even weaker now than before.

It comes after a year of interest rate hikes by the ECB as part of an aggressive campaign to combat rising inflation. Since July 2022, the ECB has upped its lending rates by 425 basis points, with yet another rate hike predicted next week.

Slow pass through

Research also shows overnight deposits to be considerably weaker in Ireland than in other countries, with the vast majority of Irish savers - about 94% - holding money in these sort of accounts. 

Over the past year, Irish banks have been notably slow in passing rising deposit rates onto savers, with the likes of AIB, Bank of Ireland and Permanent TSB coming under sustained pressure from the government to up their offerings for customers. 

In the same time, mortgage rates have almost doubled, according to the Central Statistics Office, with the Central Bank paper finding that while mortgage rates have not increased by as much in Ireland as they have in other countries, Irish pass through appears to be "in line with historical norms." 

Despite being implemented at a slower rate, Irish mortgage rates have still managed to outpace the euro area average, with Central Bank figures showing Irish rates reached a 3.8% average, exceeding the 20-state mean of 3.7% in July this year.

Lack of competition

As Ireland's banks become increasingly concentrated, Deputy Governor of the Central Bank of Ireland, Vasileios Madouros said, "To date, we have seen weaker interest rate pass-through in Ireland for deposits and for new mortgage rates compared to our euro area peers.

"Potential factors driving these trends include the relatively ample deposit base of the Irish retail banking system and the evolution of competitive dynamics within the market for banking services."

For years, a lack of adequate banking competition has been equated with higher interest rates, with the recent departures of KBC and Ulster Bank making the Irish banking sector increasingly concentrated.

As competition declines, a number of historical norms have changed, with the pass through of overnight deposits weaker now than in previous cycles, while business term deposits appear to be stronger in this cycle than in previous ones. 

"Effective transmission of the ECB’s monetary policy to the domestic economy via the banking system is key for the fight against inflation," Mr Madouros continued. 

"Given historical patterns, we expect the banking channel of monetary policy transmission to continue to strengthen in the months ahead and will continue to monitor the transmission using a wide array of indicators and analysis.”

Just last week, Ireland's largest lenders increased its interest rates for savers, with some products now offering up to 3% on certain amounts over specific time frames. However, some criticised the move, arguing that it did not go far enough, nor did it apply to a large enough array of products.

Noting early evidence of monetary policy transmission, the Central Bank said a longer-term assessment will be possible in the coming months, which will incorporate "any changes in commercial banks’ interest rates" after June 2023.