Borrowers are set to benefit from a significant fall in interest rates, with the Irish Permanent announcing a reduction certain to be followed shortly by other banks and building societies. The Irish Permanent, the State's largest mortgage lender, announced yesterday that it will cut its variable mortgage rate by three quarters of a percentage point.
The move follows yesterday's long-awaited announcement from the Central Bank that it was cutting its key money market rate as part of its preparations for membership of the single currency.
The Bank said it was cutting its repurchase rate, the rate at which it supplies funds to the banks, by 1.25 percentage points to 4.94 per cent, with effect from Monday.
A further substantial reduction in Central Bank rates is inevitable by the end of the year and the key money market rate is set to fall by another 1.6 percentage points, meaning further reductions for borrowers will follow in the months ahead.
The reduction in Irish Permanent's variable annuity rate will mean a £22.61 saving each month on a £50,000 mortgage. But savers, who are already facing dwindling returns from money on deposit, will see returns fall in line with the variable lending rate. The Irish Permanent has yet to announce its new savings rates.
The Central Bank's larger-than-expected cut is certain to trigger reductions at other lending institutions next week.
National Irish Bank has already reduced its variable interest rate by half a percentage point in anticipation of the move, while the other banks and building societies have been monitoring the situation closely and are expected to follow suit.
However, it is unlikely that any of the institutions will pass on the full fall in official rates to borrowers, because of the need to protect savers, while maintaining their profit margins. A spokesman for Irish Permanent said the company would "try to balance the interests of savers and borrowers as rates drop".
The Central Bank announced the interest rate reductions late in the working day, startling many in the financial markets who had resigned themselves to waiting until Monday for any news.
The move here is in line with reductions elsewhere in Europe, as states joining the single currency move rates down towards German levels. It came just two hours after the Bank of Portugal cut its key interest rates by half a percentage point and followed a similar move by the Bank of Spain earlier this week.
Interest rates in all three countries were out of step with the 3.3 per cent wholesale market rate prevailing across the euro zone and many commentators believe the cuts were co-ordinated ahead of a European Central Bank council meeting on Tuesday, when the issue of interest rate convergence is due to be discussed.
The Central Bank has been coming under increasing pressure in recent weeks to begin the convergence process and not leave the rate reductions until the end of the year. Irish rates still have to fall by 1.6 percentage points to get down to euro levels.
Economists now think the Central Bank may complete the convergence process in one - or at most two - more moves. However, they expect the Bank to wait and see if next month's inflation data confirm that the downward trend in prices is continuing before sanctioning the next drop.
"It's a bigger than expected cut, in fact it's a huge move," said Dr Dan McLaughlin, economist at ABN AMRO. "It takes the rate under 5 per cent, just 1.6 per cent off the 3.3 per cent convergence rate, so one more move might do it."
The Central Bank also announced a one percentage point reduction in its short-term facility rate to 5.75 per cent.