Is AIB preparing to cast negative rates net more widely?

European Central Bank (ECB) president Christine Lagarde continued to insist on Wednesday that her organisation is very unlikely to raise interest rates next year, even as speculation mounted that the Bank of England may move as early as Thursday to hike rates to rein in inflation.

But AIB chief financial officer Donal Galvin thought it was time, as the bank issued a trading update, to share his maths with analysts on what rising rates would do for his income line. A one percentage point upward move in all interest rates would boost AIB's annual net interest income to the tune of about €250 million, based on the current composition of its balance sheet, he told analysts on a call.

While he said an income boost from rising UK rates would be felt almost immediately, the situation is more complicated in the euro zone, with a real benefit only kicking in once the European Central Bank’s negative deposit rate, currently at minus 0.5 per cent, moves towards zero. Lagarde plans to keep him waiting.

Passing on pain

The ECB introduced negative deposit rates in 2014. Irish banks were initially reticent about passing on the pain to customers, but have been active in recent times.

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At the start of this year, AIB was charging negative rates to many businesses with more than €3 million on deposits. The cut-off point at Bank of Ireland was €2.5 million. Both have moved to lower the threshold to €1 million and bring in personal account holders for the first time. And it emerged on Wednesday that Permanent TSB plans to pass on negative rates to large corporate deposits.

While Irish banks have been grappling with excess deposits in recent years, amid muted loans demand, the situation has been exacerbated by a surge in household savings during Covid-19. AIB has predicted that about €16 billion of its deposits will be subject to negative rates by the end of this year.

Galvin said on Wednesday the bank “remains always alert” to widening the net further. “This will be the area where we will be able to offset some of the drag [on net interest income],” he said.

Is he preparing the ground to move below the threshold below €1 million? Or will he go beyond merely passing on the ECB’s official minus 0.5 per cent rate and join Bank of Ireland, which is charging 0.65 per cent on deposits subject to its negative-rate policy?