Ulster Bank Group not passing on full ECB rate cut

ULSTER BANK and First Active have broken ranks with their rivals by not passing on to existing customers the full 0.75 percentage point interest rate cut by the European Central Bank (ECB).

The banks, which are owned by Royal Bank of Scotland in Britain, said they would cut their standard variable rate by half a percentage point due to the "increased cost of money being experienced throughout the banking sector".

This brings their variable rates from 5.1 per cent to 4.6 per cent.

New customers borrowing from either lender will lose out as the rate reduction is only being passed on to existing customers.

Ulster Bank Group, which owns First Active, is the only mortgage lender in the State not to pass on in full the record rate reduction.

The group's customers on tracker rates will see a 0.75 percentage point reduction in their monthly repayments, as per the terms of the tracker rate product.

Five lenders confirmed yesterday that they intended to pass on the full rate cut to customers for owner-occupiers.

They are Permanent TSB, KBC Homeloans, EBS building society, National Irish Bank and Irish Nationwide Building Society. They follow the State's two largest banks, AIB and Bank of Ireland, and Halifax-Bank of Scotland (Ireland), which said on Thursday that they would be passing on the cut.

Permanent TSB, the largest mortgage lender in the State with about a fifth of the market, said it would pass on the full ECB rate reduction to tracker and variable rate mortgage holders, but warned "high inter-bank rates could prevent future reductions being passed on in full".

"If the gap between the ECB base rate and the funding market narrows, we hope to be able to pass on reductions," said Irish Life Permanent in a statement.

However, the company added that if the gap remained wide it may not be able to pass on the full effect of interest rate reductions.

While lower interest rates stimulate economic activity, they are putting pressure on bank profits.

The cost of borrowing in euro for three months - the inter-bank rate setting the banks' own mortgage costs - fell to its lowest level in more than two years. At 3.56 per cent, it is still well above the new ECB benchmark rate of 2.5 per cent. The difference between the two rates is squeezing bank profit margins and leaves banks breaking even or making losses on some of their existing mortgages.

EBS said it would reduce its standard variable rate mortgages by three quarters of a percentage point to 4.13 per cent for January mortgage repayments. It would also reduce its tracker mortgages in line with the ECB cut.

The building society's subsidiary, Haven, which sells mortgages through brokers, said it would pass the rate reduction on to investors as well as to homeowners.

NIB and Irish Nationwide said the rate cut would be passed on to holders of variable and tracker rate mortgages. KBC Homeloans (formerly IIB Homeloans), the State's fifth largest mortgage lender, said it would pass on the full rate cut to "owner-occupier residential mortgage customers".

Frank Conway, director of the mortgage broker company, Irish Mortgage Corporation, said: "Some lenders have taken a little longer to issue their statement of intent to the market, but it appears that momentum and pressure is building to pass along the full value of the interest rate cut."

He said that Haven was "going the extra step" by also passing the cut on to investors. This would be welcomed by those with investment properties, he said, as rents have been falling and are likely to remain under significant pressure.

The 16-month global banking crisis has increased the cost of bank funding. The series of interest rate cuts and various state bank guarantees and bailouts have reduced funding costs, though inter-bank rates remain high.

The ECB's rate reduction from 3.25 per cent to 2.5 per cent is the sharpest cut in the Frankfurt-based bank's 10-year history. The change will likely result in a fall of €43 for every €100,000 borrowed based on a 30-year term loan.

The ECB has cut rates from 4.25 per cent to 2.5 per cent in three cuts over just two months.

The Bank of England cut its key rate by one percentage point to 2 per cent, its lowest level since 1951.