Irish banks lag behind wider euro zone in passing rate hikes to on-demand savers

Irish banks have so far lagged behind peers across the wider euro zone in passing on official rate hikes to households with overnight – or on-demand – deposit accounts, a Central Bank paper published on Tuesday has confirmed.

The pass-through has also been weaker across the euro area in the current period of European Central Bank (ECB) rate hikes, which began in July 2022, than during the last cycle more than a decade and a half ago, the paper noted.

The State’s banks have also been slower than peers across the wider euro zone at passing on rate hikes for new mortgages, it said. However, the pace at which Irish and European banks have hiked business loan rates has been stronger than in the last cycle.

The ECB has raised its key deposit rate from minus 0.5 per cent to 3.75 per cent since the middle of last year amid a fight against inflation. While euro zone inflation had fallen to 5.3 per cent in August from a peak of 10.6 per cent late last year, it remains well ahead of the ECB’s 2 per cent target.

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The Central Bank analysis looks at data running to the end of June. The Republic’s three remaining banks have each announced deposit rate increases in recent weeks in response to mounting public and political pressure on the matter, after they reported strong growth in interest income for the first half of the year on the back of rising rates.

The three are now offering rates of up to 3 per cent for fixed-term deposits. However, about 94 per cent of the €151.3 billion of Irish household savings at the end of June were in overnight deposit accounts, which include current accounts, earning an average of 0.07 per cent of annual interest.

“Over the history of the euro area, pass-through by banks is not 100 per cent for any product and differs by the type of product. Pass-through is typically strongest to business loans and business term deposits. Pass-through is weaker to mortgage rates and weaker still to overnight deposit rates, especially for households,” the Central Bank paper said.

Still, the paper noted that the Irish pass-through of rates on existing loans has been stronger than the euro-area average, driven by the share of ECB tracker mortgages in the Republic where official rate changes are passed on automatically.

Deputy Central Bank governor Vasileios Madouros said that “effective transmission” of ECB monetary policy through the banking system “is key for the fight against inflation”. He said that he expects that banks will improve their transmission of channel central bank moves in the coming months.