Irish lenders refuse to pass on full ECB cut

Two of the major players in the Irish mortgage market have come under fire for refusing to pass on in full the latest interest rate cut from the European Central Bank.

The reduction, a record 0.75%, brings the ECB benchmark rate to 2.5%, the lowest since June 2006, with the prospect of more cuts next year.

The biggest beneficiaries are those on tracker mortgages that are tied to the ECB rate, but other householders on a typical 30-year loan should see their repayments fall by over €40 a month for every €100,000 borrowed.

However, while the four banks and two building societies covered by the state guarantee scheme – AIB, Bank of Ireland, Permanent TSB, Anglo Irish Bank, Irish Nationwide and the Educational Building Society – will pass on the full reduction, Ulster Bank and its subsidiary, First Active, which have opted out of the scheme, will not.

Instead they have announced that their standard variable rate will be cut by just 0.5% from next month.

The decision provoked an angry reaction. Finance minister Brian Lenihan says lenders “are well aware of the government’s views” on the need to pass on the cuts to ease pressure on homeowners, and an ECB executive board member, Lorenzo Bini Smaghi, echoed that. The criticism from the Irish Consumers’ Association was more pointed.

James Doorley, chairman of the Irish Consumers’ Association, says: “These cuts were made to help consumers, not to puff up bank profits. They must be passed on in full.”

Both lenders, owned by the Royal Bank of Scotland, denied that they were boosting their profits, with a spokesman insisting they were, in fact, losing money because of the large number of tracker mortgage holders among their customers. Their argument was not helped by the fact that another financial institution not in the state guarantee scheme, Halifax Bank of Scotland (Ireland), is implementing the full rate reduction.

Next time round, Ulster Bank and First Active may not be alone in withholding part of the rate cut. In a surprising statement, another major domestic mortgage lender, Permanent TSB, said it could not guarantee to implement future ECB reductions.

A spokesman says: “We need to see the ECB base rate being more closely aligned to the rate for borrowing on the wholesale market.

“If the gap between the ECB base rate and the funding market narrows, we hope to be able to pass on future reductions. But if the spread remains wide, we may not be able to pass them on in full.”

The current debate is taking place against a background of a deepening recession, soaring unemployment and a plummeting housing market. Latest figures from the Irish Central Bank show the growth in mortgage lending at a 22-year low.