AIB rate cut the best that can be hoped for

Variable mortgage rate customers of AIB – both the 156,000 existing as well as any potential new ones – were likely cheered yesterday by the announcement that the bank will cut its rate by a further 25 basis points, bringing it down to a market leading 3.65 per cent.

However, it may well be the last such move customers of the bank will see.

Yes, borrowers may continue to look aghast at a European Central Bank rate of just 0.05 per cent, and the interest rate they will be paying on their home loan which will still lie some 360 basis points north of this. However, further relief is unlikely to be on the horizon, with bank analysts drawing their own conclusions from the bank's results yesterday.

After all, the 25 basis points reduction in the bank’s variable rate is expected to drag the bank’s net interest margin down by about eight basis points, leading some to conclude that it’s a clear message the bank doesn’t intend to cut rates any further.

While new AIB chief executive Bernard Byrne did not rule out further rate cuts at a press briefing yesterday, "I'm not saying it's done", he was also keen to stress the numbers behind such a move.

Given that the bank has a stated goal of generating a margin of in excess of 2 per cent, and it’s currently funding at an average cost of 138bps [1.38 per cent], the scope for further variable rate cuts may not be as great as borrowers would hope.

Where there may be some more progress however, is in the variable rates of other banks, with Bank of Ireland still clinging to a hefty rate of 4.5 per cent, some 85 basis points more than AIB.

If competitive forces are what one would hope for, the pressure should remain on BOI to cut its rates, although it seems committed to trying to attract customers with 2 per cent cash backs on their mortgage or offer lower fixed options, rather than lower its variable rates.