Cantillon: AIB and KBC cut rates – who will follow?

As Michael Noonan debated Greece's bailout programme at a eurogroup meeting in Brussels yesterday, there was some good news from home, with both AIB and KBC Bank Ireland announcing cuts to their mortgage interest rates.

This was a welcome development for the new Fine Gael-Independent minority government, coming less than 72 hours after it had taken office.

AIB, which is 99.9 per cent State owned, said it was a commercial decision to lower its standard variable rates (SVRs), but the timing might not have been entirely coincidental.

The draft document for a partnership government had stated that it was not “ethically acceptable” for Irish banks to charge “excessive interest rates” on standard variable mortgages – some Irish SVRs are two percentage points higher than the European average.

The document talked about establishing a new code of conduct for mortgage switching, and requesting the Competition and Consumer Protection Commission to set out options that might lower rates and improve competition.

But it stopped short of giving sweeping powers to the Central Bank to cap rates. The regulator doesn't want such powers, with governor Philip Lane stating that it would be a "crude instrument" that could deter new entrants to the market.

Fianna Fáil and Sinn Féin are prepared to put this to the test with a race on between their respective finance spokesmen – Michael McGrath and Pearse Doherty – to bring forward bills that would give the Central Bank powers to cap rates.

Of course, there is no guarantee that the Central Bank would actually exercise any new powers.

The spotlight is now on Bank of Ireland, which writes about one in three new mortgages and in which the State is a 14 per cent shareholder, and Ulster Bank. Both have focused their reductions on fixed interest rates rather than SVRs.

Bank of Ireland's 4.5 per cent SVR for customers with a loan-to-value ratio of 80 per cent or more is one of the highest in the market. So it will be interesting to see how Bank of Ireland boss Richie Boucher responds to these latest competitive and political threats.