Central Bank does not want powers to force lenders to pass on interest rate cuts

Central Bank does not want powers to force lenders to pass on interest rate cuts

THE Central Bank has told the government it does not want powers to force lenders to pass on interest rate cuts to mortgage-holders.

In a letter sent to the Taoiseach on Friday, the Financial Regulator and deputy governor of the Central Bank, Mathew Elderfield, said the Central Bank would prefer to address the issue of banks not passing on interest rate cuts as part of his wide regulation of the banking sector.

The Irish Times reports that he told the government it may need to consider a remedy under competition law, as the dysfunctional nature of the banking market was one of the main factors preventing rate cuts being passed on.

Mr Elderfield’s letter is in response to a request from the Taoiseach last Wednesday and followed a meeting with the chief executives of the main retail banks during which Bank of Ireland, AIB and Ulster Bank said they would not pass on to customers the recent reduction by the European Central Bank (ECB) of its base rate by a quarter of a percentage point. Enda Kenny asked Mr Elderfield to report to the Government if he needed more powers to protect the interests of consumers.

The Central Bank is independent of the Government and cannot be given directions, but Mr Kenny’s request was in effect an invitation to it to take action against the banks.

The Central Bank has taken the view that while it might be possible for it to assume powers that would allow it set retail interest rates, it does not believe this is appropriate.

Funding difficulties mean none of the banks are competing to lend, particularly in the mortgage market. In some circumstances they are using the lack of competition to extract more money from existing customers, the regulator believes.

The Central Bank has told the Government it will address the issue as part of its wider engagement with the banks. The regulator will be reviewing with the banks their mortgage arrears strategies and believes this and other issues will give it a lever with which to ensure the banks act fairly in setting retail rates.

The lack of competition may have to be addressed through regulation, but this would fall under the umbrella of the Competition Authority, the Central Bank said.

AIB agreed to cut rates last Thursday after direct pressure from the Government. Permanent TSB and Irish Nationwide, which have also been nationalised, had already agreed to pass on the cut.

The Central Bank’s decision not to get directly involved in setting retail interest rates may prove embarrassing for the Government and Tánaiste Eamon Gilmore, who has been vocal on the issue and said the Government will legislate if needed.

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