Central Bank chief wants lenders to ‘respond’ to ECB rate cut

The Central Bank expects lenders here to start passing on interest rate reductions to borrowers, governor Gabriel Makhlouf said, even as the European Central Bank (ECB) does not have a clear path forward on when it will cut rates again.

Borrowers with tracker mortgages will see an immediate reduction in their interest rate after the ECB’s first cut in five years on Thursday, but the governor said he expected lenders to “respond” to the ECB move for those on mortgages that do not adjust for ECB interest rates.

“We now expect banks, other lenders and the financial system as a whole to start to respond to the rate reduction,” Mr Makhlouf told RTÉ radio on Friday. “At some point I do expect that to happen but the pace at which it happens” will “vary” depending on a borrowers’ contractual arrangements.

“It’s good news for borrowers, it’s probably not good news for savers,” Mr Makhlouf said.

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While the ECB “judged that we are getting on top of inflation which at the end of the day harms everybody in society”, it is “not absolutely clear as to the pace of the disinflationary process”, Mr Makhlouf said.

“We’re now confident that the disinflationary process is working. It doesn’t mean we know how fast we will carry on, if at all. The road is bumpy,” he added.

As head of Ireland’s central bank, Mr Makhlouf sits on the ECB’s governing council, which voted in favour of reducing interest rates for the first time in five years on Thursday.

Still, with signs that inflation is proving stickier than had been hoped, he reiterated the ECB’s position that it has yet to make a decision on future rate cuts.

ECB data published on Friday showed euro-zone wages rose more quickly than expected in the first three months of this year. A big increase in wages is particularly concerning for ECB officials as that can lead to a feedback loop, known as a wage-price spiral, that can push inflation ever higher.

The governor also played down a report from think tank the Economic and Social Research Institute (ESRI) last week which found the Central Bank’s decision ease rules on mortgage lending had driven up house prices. In a highly critical assessment of the regulator’s move to soften the rules, the ESRI said the average loan-to-income ratio in the Irish mortgage market was now back to multiples “only previously seen at the peak of the Celtic Tiger boom”.

“I don’t think we’ve ever denied the changes we made would add to prices,” he said. “The whole system is about preventing reckless lending and borrowing and there is no evidence that those changes ... are actually leading to destabilising the financial system.”

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