Mortgage rates are set to rise by about 0.5 of a percentage point, with at least one main lender expected to announce an increase today. This follows a decision by the European Central Bank yesterday to raise base interest rates in the euro area.
Banks and building societies are expected to move quickly to increase rates, despite being slow to reduce borrowing costs earlier this year in response to lower wholesale interest rates after the Republic joined the euro.
Last night the Minister for Finance, Mr McCreevy, at the Institute of Bankers' annual dinner, effectively accused the sector of charging exorbitant rates until it was challenged from overseas.
He said he was disappointed that it took the arrival of an "aggressive outside competitor", the Bank of Scotland, to get them to reduce interest rates and accept lower profit margins.
In unprecedented criticism of the industry, Mr McCreevy said he had been disturbed by some of the things which had emerged in recent years relating to it. He warned that he is prepared to undertake a further review of all relevant powers, and will take any action necessary in the public interest.
He also said he considered it timely to undertake a strategic review of the future of the industry, tackling issues under its own control and, possibly, aspects of Government policy, to facilitate change.
As expected, the ECB raised base interest rates yesterday by half a percentage point to 3 per cent, and most Irish lenders are expected to follow suit in coming days.
Most banks and building societies are likely to raise their main variable mortgage interest rates by a full half of a percentage point. In contrast, they were slow to pass on the full benefit of wholesale rate reductions earlier this year.
According to Mr Martin Walsh, head of lending at the Educational Building Society, there is a "high likelihood that the increase will be passed on in full", given the recent contraction in profit margins.
Mr Richard Hoare, general manager at First Active, said it could be "assumed" that variable rates would rise by half a percentage point. He added that fixed mortgage interest rates were also likely to be adjusted.
When contacted last night, other lenders said they would also be raising rates over the coming days, and "most if not all" of the increase would be passed on to customers. Even the Bank of Scotland, which cut rates only last week as it seeks to establish a presence in the Irish market, said it is reviewing its position, given this large additional cost to its funding.
It is unclear as yet whether the lenders will increase the interest rates payable on deposits, which have fallen to historic lows.
According to analysts this should be the last interest-rate rise for some time. Mr Jim Power, chief economist at Bank of Ireland, said the ECB would have to wait until well into the new year before it can raise rates again.
"The probability is still that rates will be half or three-quarters of a percentage point higher at the end of next year."