Banks must be cautious on lending

THERE is good and bad news for Ireland in the European Central Bank’s slashing of its principal interest rate to 2% in the 12-nation eurozone.

On the plus side, mortgage holders and exporters stand to gain from the cut which brings the Irish rate to its lowest level since 1948.

Conversely, however, it will have an adverse impact on home buyers, forcing them to borrow more to keep pace with house costs in a property market where prices have literally gone through the roof.

The decision will take the heat out of money markets, bringing a measure of relief to Irish-owned firms and assuaging fears that the growing strength of the euro would cause job losses.

According to a recent survey conducted by ISME, the business organisation, one in four firms believed lay-offs were imminent. Those fears will now be offset.

However, with Ireland’s inflation rate at over twice the European average, pressure is growing on the Government to impose an even tighter rein on direct and indirect spending, especially as poor tax returns put pressure on Exchequer finances.

Whether bank customers will benefit fully from the half per cent reduction remains unclear but there is a compelling case for reducing rates, particularly the excessive charges of 17% on credit card borrowing.

There is an onus on financial institutions to follow the ECB’s lead by immediately lowering mortgage rates.

However, the banks must exercise caution and guard against over-extending the borrowings of first-time buyers forced to go deeper into debt as house prices are driven up relentlessly.