Banks and building societies have been put on notice that Ireland's new financial regulator expects this week's half percentage point cut in interest rates to be passed on to customers. Dominic Coyle reports
The Tánaiste, Ms Harney, has also warned lenders not to use the European Central Bank's action to increase their own profits.
The Irish Financial Services Regulatory Authority (IFSRA) which monitors the financial sector, rejected lenders' contention that rates were now so low that passing on the full reduction could damage their business.
Ms Harney said she expected all financial institutions to pass on the full half-percentage point cut to borrowers. On NewsTalk 106 radio, she said: "I'll be very disappointed, surprised and angry if it wasn't passed on. In a competitive market, that is what you would expect."
A spokesman for the regulatory authority, Mr Neil Whoriskey, said: "The ECB's action is a cost-saving to the lending institutions when they source their money and we would expect them to pass this on to their customers. It can take some days to work its way through the system but it is something we are going to look at and monitor."
He declined to comment, however, on a call by Fine Gael's finance spokesman, Mr Richard Bruton, for an investigation on the failure of lenders to pass on rate cuts in the past two years. Mr Bruton alleges that between December 2000 and December 2002, when ECB rates fell from 4.75 per cent to 2.75 per cent, banks passed on only about half that amount to business and personal customers, although mortgage-holders received just short of 90 per cent of the benefit.
Bank sources said this was not true and that if anything, banks tended to move more quickly when rates were cut than when they were rising.
Meanwhile, IIB Bank yesterday became the first Irish lender to follow the ECB's reduction, cutting its variable rate by the full half per cent to 3.45 per cent.
The rate will be available to new customers immediately and to existing borrowers from July.
A spokesman for the mortgage bank said it provided one in every eight mortgages in the Republic.
"We operate primarily through the broker network and, with the new rules governing best advice, being competitive on rates will prove increasingly important in the future," Mr John McAlinden, head of marking at IIB Homeloans, said.
The State's two largest banks, AIB and Bank of Ireland, expect to reach a decision on how to react to the ECB move by the middle of next week. A spokesman for Bank of Ireland said it was easier for institutions like IIB, which rely on wholesale money markets for their mortgage funds rather than using customer deposits, to make a speedy decision on rates.
"From our point of view, the objective of a rate change is that they be revenue-neutral," Mr David Holden, head of group public affairs at Bank of Ireland, said. "However, rates are now so low that if the full amount was passed on to borrowers, it would be revenue-negative, as we simply do not have the scope to cut savings rates by that amount."
He said margins at the bank had already fallen by 30 basis points between January 2001 and February 2003, knocking €60 million off profits.
Bank of Ireland recently warned that a half-point cut in rates would lower profits by €10 to €12 million.
Goodbody analyst Mr Len Riddell said lower interest rates were presenting problems for banks. "Definitely at these levels, the squeeze is being felt," he said.
Mr Riddell said that a move by one of the building societies to follow IIB might make it incumbent on the larger banks to follow suit, even if they did not pass on the full half-percentage point cut.
Mr Whoriskey said the regulator did not believe the banks had no room for manoeuvre on cutting rates.
"When new entrants came into the market a few years ago, margins quickly dropped despite earlier claims that this would not be possible."