ECB interest cut - Banks must pass on the windfall

WITH good news rarer than hen’s teeth in these troubled times, the surprise decision of the European Central Bank (ECB) to cut eurozone interest rates will be welcomed by hard-pressed mortgage holders struggling to pay arrears.

The burning question is whether the banks will have the decency to pass on this windfall to their customers. The promise of Permanent TSB to pass on the rate cut to customers with both variable and tracker mortgages is a good omen. But there is no guarantee that all of the financial institutions now being bailed out by beleaguered taxpayers will be equally sympathetic to borrowers.

The interest rate reduction to 1.25% from 1.5% could mean a monthly saving of up to €15 per €100,000 borrowed by those fortunate enough to have a 25-year tracker mortgage. But for tens of thousands of people on variable mortgages the outlook is less certain. If other banks fail to pass on the latest interest rate cut, people will look to Financial Regulator Mathew Elderfield for protection. Significantly, the regulator was reminded yesterday of his recent promise to take action if cuts were not passed on. The reminder of that pledge came from Finance Minister Michael Noonan who was commenting on the latest cut. Not mincing his words, he emphasised that “obviously the banks should pass it on. It will automatically pass on to trackers. But I think the regulator has already made it clear that he will intervene if he thinks that rate cuts in Europe are being absorbed by the banks rather than being passed on to customers”.

Mr Elderfield told bankers to put an end to increases in the standard variable rates on mortgages, a means of offsetting losses incurred on tracker mortgages. He warned that failure to comply with his request would see restrictions imposed on their scope to increase rates in other areas.

While the ECB had been expected to lower interest rates because of the poor prospect of growth across the European and global economy, the timing of the cut has taken observers by surprise. Announced at its meeting in Frankfurt, the first session chaired by new ECB president Mario Draghi, the move will inevitably be seen as implied criticism of his predecessor Jean Claude Trichet who was reluctant to cut interest rates for fear of driving up inflation already at 3% and out of kilter with the 2% ECB target.

To make Europe more competitive, two similar cuts are anticipated between now and early in the new year, an injection of 0.75% to the economy, effectively bringing the eurozone more into line with the current 0.25% rate in the dollar area. For a welcome change, share prices improved on stock markets in an immediate and positive response to yesterday’s cut.

Mortgage holders are entitled to look to Mr Elderfield for security against greedy bankers. For the sake of thousands of cash-strapped home owners in arrears, he should not hesitate to get tough with any bank that ignores his bid to protect people mired in financial trouble. Refusal to pass on the ECB reduction should be met with swift and uncompromising action.