Dáil Éireann Debate, Tuesday - 21 May 2013
90. Deputy Micheál Martin asked the Minister for Finance his assessment of the benefit to the economy of the recent ECB cut in view of the decision of financial institutions not to pass on the cut to customers with variable rate loans; and if he will make a statement on the matter. [23926/13]
View answer91. Deputy Denis Naughten asked the Minister for Finance if he will outline the discussions, if any, he has had with the commercial banks to ensure that ECB interest rate cuts are passed on to variable rate owner occupied mortgage holders; and if he will make a statement on the matter. [23658/13]
View answerI propose to take Questions Nos. 90 and 91 together.
As I have stated in a previous Parliamentary Question today on the European Central Bank interest rate cuts, the lending institutions in Ireland, including those in which the State has a significant shareholding, are independent commercial entities. I have no statutory role in relation to regulated financial institutions passing on the European Central Bank interest rate change. It is a commercial matter for each institution concerned. Neither have I responsibility for the interest rate paid to depositors by the financial instructions.
The Central Bank has responsibility for the regulation and supervision of financial institutions in terms of consumer protection and prudential requirements and for ensuring ongoing compliance with applicable statutory obligations. The Central Bank has, however, no statutory role in the setting of interest rates by financial institutions, apart from the interest rate cap imposed on the credit union sector in accordance with the provisions of the Credit Union Act, 1997.
The mortgage interest rates that financial institutions operating in Ireland charge to customers are determined as a result of a commercial decision by the institutions concerned. This interest rate is determined taking into account a broad range of factors, including European Central Bank base rates, deposit rates, market funding costs, the competitive environment and an institution’s overall funding arrangements.
I would remind the Deputy that in late 2011 the Taoiseach asked for the Central Bank’s opinion on developments regarding mortgage interest rates and on possible action by the Central Bank in that regard. In a letter to the Taoiseach dated 11 November 2011, the Deputy Governor of the Central Bank stated that the Central Bank would not be seeking the power to have regulatory control over the setting of retail interest rates. He indicated that experience of such controls in the past, and in other countries, did not encourage the Central Bank to believe that such a regime would be advantageous in net terms as the banking system recovers its normal functioning. Binding controls tend to reduce the availability of credit and channel it to the most creditworthy customers, starving smaller and less secure customers from credit. Binding controls would have a chilling effect on the entry of sound competitors in the market. By absolving banks from their responsibility to price risk accurately, binding interest rate controls would, especially during the recovery phase, impede progress towards the re-establishment of bank management practices that can ensure a healthy and free-standing banking system no longer dependent on the Government for bail-outs. The Deputy Governor mentioned also that, within its existing powers, and through the use of persuasion, the Central Bank would continue to engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds and this is a course of action I expect the Central Bank to continually appraise.
On specific economic assessments of changes to interest rates, I would refer the Deputy to the recent Stability Programme Update 2013 which published analysis done by the ERSI using their HERMES model of the effect of a 1% change in interest rates on key macroeconomic variables on the economy. The simulations show the impact that a 1 percentage point increase in the rate in the first year for the following four years beginning in 2013 could reduce GDP by up to 1.7 per cent by 2016 and would add 1 percentage point to the deficit as a percentage of GDP by 2016. While the simulated effect is broadly symmetric, the proximity of policy rates to the zero lower bound means the potential magnitude of the effect could be larger for a rate increase compared to a rate decrease.
