Interest rate cut may not be passed on in full to Irish borrowers

Irish borrowers with tracker mortgages will benefit from the ECB rate cut. Picture: Denis Minihane

The European Central Bank yesterday delivered an interest-rate cut, but the benefits for Irish borrowers remain uncertain 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.

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 earlier 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 hold 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 on the banks has increased in a year of elections 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 and 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, founder of the askaboutmoney website, said he thought it unlikely that Irish banks would pass the full extent of the official rate cuts on to 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 cut their rates rapidly. 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 on "only" a third of the ECB rate hikes.

In Frankfurt, ECB president Christine Lagarde said the time was right to ease rates as price pressures weaken in the eurozone economy, but the central bank still wasn't prepared to make pledges on future rate cuts.

Christine Lagarde said the ECB wasn't prepared to make pledges on future rate cuts. Picture: Michael Probst/AP

 It was looking out for "bumps on the road" from potential outsized wage increases as it reined in inflation, she told reporters.

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%.

 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.

Irish economists have warned that the ECB rate cuts and the prospects for the Government coalition offering even more incentives for first-time buyers in an election year will increase the risk that Irish house price inflation will take off. 

Some market participants said that although the ECB may be slower than once thought to cut rates, it will nonetheless cut its key deposit rate to 2.5% by the end of next year. 

Irish economists warn that the cuts could push annual house price inflation higher, and house prices could end the year at higher levels than once anticipated.