Irish banks push back against passing on ECB rate cut in full

The Banking and Payments Federation Ireland, the business group for Irish banks, said that lenders here had passed "only" a third of the ECB rate hikes of the past two years

The European Central Bank delivered an interest rate cut on Thursday, but the benefits for Irish borrowers remain clouded, as Irish lenders push back against calls to pass on lower borrowing costs in full, industry experts have warned.     

In a widely expected move, the ECB unveiled a quarter point rate cut at its gathering in Frankfurt, the first since it started out almost two years on its aggressive campaign to fight inflation by driving eurozone borrowing costs to record high levels. 

ECB president Christine Lagarde said the time was right to ease rates as price pressures weaken in the eurozone economy, but still wasn't prepared to make pledges on future rate cuts, she said. The central bank was looking out for "bumps on the road" from potential outsized wage increases as it reined in inflation, she told reporters. 

The 179,000 Irish borrowers with tracker mortgages -- who have taken the brunt of the ECB rate hikes since July 2022 -- will automatically get some financial relief from the ECB rate cut. Tracker mortgage households are set for further cut of 0.35% in September, albeit a one-off rate reduction, after the ECB made a technical decision to realign its official rates, a move that favours tracker customers. Thursday's rate cut will shave €30 from the monthly repayment bill of tracker households. 

However, a significant slice of the 429,000 Irish households who have fixed-rate mortgage loans will have a longer wait to discover whether they will tap the full benefits from the rate cut. Many home loan borrowers who negotiated fixed rate terms at rates as low as 2% to 2.5% before the ECB started out on its hiking campaign, will face higher monthly repayments when they refinance their loans this year, regardless of Thursday's ECB rate cut.  

Political pressure has grown on the banks since AIB and Bank of Ireland posted huge profit hauls of €2bn and €1.9bn, respectively, for 2023, thanks to the ECB rate hikes and the monopoly power they deploy in the Irish banking market.  

Taoiseach Simon Harris said he had written to the banks to find out when they would cut interest rates for borrowers. Pearse Doherty, Sinn Féin's finance spokesperson, said the banks have made "massive profits" and it was time for the lenders to cut interest rates they charge customers. 

However, Brendan Burgess, the founder of the askaboutmoney website, said he thought it unlikely Irish banks would pass on the full extent of the official rate cuts onto their fixed rate loans. The banks will argue that they have anticipated some of Thursday's ECB rate cut, he said. 

Michael Dowling, a leading mortgage broker, said that the banks will likely ignore calls from government and opposition politicians in an election year to rapidly cut their rates. Irish lenders are more reliant than their continental European peers on the income they generate from loans and they will argue that they haven't passed on the full increases, Mr Dowling said. 

The Banking and Payments Federation Ireland, the business group for Irish banks, said that lenders here had passed "only" a third of the ECB rate hikes. 

Ahead of Thursday's ECB meeting, and excluding 'green' discounted mortgage loans, new lender  Avant offered the lowest four-year fixed for first time buyers of 3.6%, Mr Dowling said. AIB offered an equivalent non-green mortgage loan of 4.75% fixed for three years, Bank of Ireland offered a 3.9% rate, and PTSB had an equivalent three-year non-green rate of 3.95%. Before the ECB meeting, the AIB-owned Haven had the cheapest 'green' rate of 3.45% that was fixed for four years, he said.  

Andrew Kenningham, chief Europe economist at Capital Economics, said that "any celebrations" about the rate cut would "muted at best". "Moreover, the bank's forecasts and statements are slightly hawkish" on the outlook for future rate cuts, he said. 

Ifo, a German think tank, said that the rate cut came as inflation heads back towards the ECB's target rate of 2%. “However, this interest rate cut has already been priced in on the markets, so the stimulus for the economy will be limited. In view of significant rises in wages and postponed interest rate cuts in the US, it is rather doubtful that further interest rate cuts will follow soon,” according to the think tank.