AIB, EBS cut rates in response to ECB move

AIB and EBS building society yesterday reduced mortgage interest rates in response to last week's cut by the European Central Bank (ECB), but all institutions are still holding off on cutting deposit rates. AIB has chosen not to pass on the full 0.5 of a percentage point cut in the ECB rates to customers but is still offering the cheapest mortgage. By Siobhán Creaton, Finance Correspondent

The bank, has announced that its standard variable mortgage rate will fall from 4.25 per cent to 3.85 per cent from December 16th and will apply to new and existing customers. This amounts to a reduction of 0.4 of a percentage point, with the bank opting to widen its profit margin on these type of mortgages from 1 per cent over the ECB rate to 1.1 per cent.

At 3.85 per cent AIB is still the cheapest variable mortgage interest rate in the Irish market.

EBS has passed on the full half percentage point rate reduction, bringing its standard variable mortgage rate down from 4.6 per cent to 4.1 per cent. The new lower rate will apply to new and existing customers from January 1st.

Bank of Ireland and First Active both reduced their rates this week by half a percentage point, bringing their rates down to match AIB's 4.25 per cent rate before its latest move. AIB and EBS are now more competitive.

AIB Bank has been very aggressive in chasing mortgage business, winning new customers by offering the lowest interest rate. The bank has also introduced a new fixed rate mortgage of 4.1 per cent which it is making available until April 2005.

The financial institutions are reviewing other lending and deposit rates and are expected to announce changes shortly.

The ECB rate becomes effective for all financial institutions today as they will be able to borrow funds in the money markets at the lower ECB rate.

The institutions are trying to keep mortgage interest rates competitive while also offering a decent return to savers. None has so far reduced deposit rates.

The banks and building societies are also still trying to assess the impact of the new Government levy, which will collect €300 million from the sector over the next three years.

According to a report from Davy Stockbrokers, the levy followed by the ECB rate cut will have a negative impact on bank earnings. First Active is expected to suffer most because all of its earnings are in the Irish economy. Davy suggests the levy will equate to an annual cost of around €2 to €3 million, or 5 per cent of First Active's profits next year.

Irish Life & Permanent will end up paying around €12 million or 3.7 per cent of next year's profits to the Government. AIB and Bank of Ireland will each pay around €20 million or 2 per cent of profits. Anglo Irish Bank is the least affected with a likely cost of up to 1.5 per cent of profits.

Davy suggests that passing on the lower ECB rate to customers will cost AIB and Bank of Ireland a further €10 to €12 million. It will cost Irish Life & Permanent another €10 million, while First Active has indicated the rate cut will have minimal impact on its earnings because of hedging arrangements.