Regulator wants ‘faster pass-through’ of interest rate increases

Ireland’s high deposit-to-loan ratio 'means banks don’t need to attract deposits'

Central Bank governor Gabriel Makhlouf said the Central Bank does not have a role in setting commercial rates on bank products, 'but it is something we monitor closely'. Picture: Sam Boal/RollingNews.ie

Central Bank governor Gabriel Makhlouf said banks have been slow to implement rate hikes for borrowers and savers introduced by European banking regulators to drive down inflation.

Speaking to the Oireachtas finance committee, Mr Makhlouf said that he wants a “much faster pass-through” of the monetary policy decisions made by the European Central Bank (ECB) since July 2022.

“To date, Irish banks have lagged behind euro area banks in respect to pass-through of interest rate increases to the household sector,” said Mr Makhlouf.

“In terms of household deposits, our latest evidence shows that pass-through has been slow.” 

In recent months, remaining retail banks here have increased deposit rates for savers. The increases came as the banks posted soaring profits following ECB interest rate hikes. AIB, Bank of Ireland, and Permanent TSB had a combined income of €1.7bn in the first half of 2023.

Mr Makhlouf said there were various reasons why banks are sluggishly passing on monetary decisions to savers.

One factor is Ireland’s high deposit-to-loan ratio, “which means banks don’t need to attract deposits”.

He also said competition in the retail banking market has become “an issue”, as banking customers have fewer options to choose from.

The remaining banks have absorbed mortgage and deposit accounts from KBC and Ulster Bank, which have exited the market here, which drove profits higher.

Mr Makhlouf said the Central Bank does not have a role in setting commercial rates on bank products, “but it is something we monitor closely”.

“We expect the banking channel to strengthen in the months ahead. 

"People should be prepared to continue to see increases in deposit and lending rates over the coming months.

“We do have powers to set the deposit facility rate and to decide how that should apply to deposits that the banks make and that could influence the decision making.”

The governor suggested that interest rates are “near the top” and indicated there will unlikely be a rate cut before next March.

AIB chief economist Oliver Mangan recently wrote in the Irish Examiner that "markets see rates starting to be cut by mid-2024, with the deposit rate being lowered to 3% by autumn 2025". 

The most recent hike by the ECB has driven the regulator’s main lending rate to 4.5%, marking the 10th consecutive increase since it began hiking rates in July 2022.

The rate hike hit tracker mortgage customers immediately, while those coming off fixed-rate agreements at the end of this year are set to face huge payment increases.

Meanwhile, Mr Makhlouf cautioned that the upcoming budget should contain “targeted, tailored, and temporary” supports that do not add to inflation.

He said that the economy is overall faring well amid a volatile interest rate environment, due in part to a “much more special relationship with the US than the UK thinks it has”.