Irish banks likely to follow ECB hike with relief for €1m+ deposit accounts

Irish banks are set to start moving soon after the European Central Bank (ECB) raises key interest rates on Thursday to pass on relief to customers and businesses currently being charged negative rates on accounts holding at least €1 million on deposit, according to industry sources.

On the lending front, mainstream banks had been expected to hold off increasing standard variable and new fixed rates, which remain among the highest in the euro zone, as the ECB was guiding recently towards a quarter percentage point increase in official rates this week.

However, with policymakers in recent days reported to be weighing half point hikes to both its deposit and main lending rates, lenders will have more to consider if the central bank does take that more aggressive move to try to tame soaring consumer prices, sources said. Euro zone inflation was running at 8.6 per cent in June, a multiple of the ECB’s 2 per cent target.

A half percentage point increase would see the ECB abandon a negative deposit rate policy that it has pursued since 2014.

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Bank of Ireland and AIB have moved belatedly in recent years to widen the net of customers to whom they could pass on charges the ECB is applying to surplus cash placed with it. The pillar banks’ deposits exceeded loans by almost €50 billion as of March.

[ What will the ECB do with interest rates on Thursday? ]

More than €30 billion of deposits across the two lenders are currently affected by negative interest rates.

AIB has been behind Bank of Ireland in expanding the scope of negative rates, which may mean that it will be slower to pass on relief as the ECB ditches negative rates, according to observers.

Bank of Ireland had lowered the threshold at which it charges negative rates to €1 million by late last year, whereas AIB only started applying charges on personal accounts holding in excess of that amount from May. Still, AIB’s negative rate stands at minus 0.75 per cent, whereas Bank of Ireland’s is 0.65 per cent.

While Permanent TSB (PTSB), the third continuing bank in the market, does not have a broad negative rates policy, it moved last December to charge 200 corporate depositors.

PTSB’s chief executive Eamonn Crowley said last month his bank may absorb initial rounds of ECB interest rate hikes and not increase mortgage pricing. He added that Irish banks “can withstand for a portion of time some of those interest rate increases”.

“Irish standard variable rates are much higher than fixed rates, so there’s no reason for the banks to move on those any time soon. And because of the high level of surplus deposits on their balance sheet the main banks don’t face any immediate need to increase fixed rates either,” said Karl Deeter, a mortgages expert and founder of onlineapplication.ie, a software system used by many of the largest brokers in the State. “It’s different for non-bank lenders, who have had to increase rates in recent months as their borrowing costs in the financial markets have risen.”

The average Irish new standard variable rate in May was 3.66 per cent, compared to 2.55 per cent for fixed rates, according to the Central Bank. The average new euro zone home loan rate stood at 1.76 per cent.

Davy analyst Diarmaid Sheridan said he would be “surprised” to see any significant mortgage pricing moves by the banks following the ECB meeting. But tracker mortgages will move in tandem with official lending rates, which currently stand at zero.

“The [ECB] rate increase will be important but arguably the signalling of where rates might get to is more important. Market expectations of where rates will be by the end of next year have been quite volatile in recent months,” he said.

Financial markets are currently predicting that the official deposit rate will end 2023 at around 1.4 per cent, up from 1.25 per cent last week.