Irish borrowers could be hit with fresh interest rate rises even in the absence of an European Central Bank (ECB) hike, as a result of the ongoing turmoil on the money markets, according to top bankers.
Senior bankers from three leading mortgage providers warned that rate rises would be passed on to many business and personal borrowers, unless money market rates fall back quickly.
Brian Goggin, chief executive of Bank of Ireland, told The Sunday Business Post that recent developments - which have resulted in a sharp increase in the rates banks charge when they lend to each other - were equivalent to ‘‘an unofficial interest rate increase’’.
Goggin, who runs the biggest mortgage lender in the country, said unprecedented market conditions meant that the increase in borrowing costs facing banks on the money markets was greater than would have been the case if the ECB had hiked rates under normal conditions.
His comments were echoed by Denis Casey, chief executive of Irish Life & Permanent, who said higher inter-bank borrowing costs would mean that his bank would make less money from individual loans than in the past.
Permanent TSB, Irish Life’s banking subsidiary, is the second-largest mortgage lender in the country. ‘‘What is clear is that if current conditions in wholesale markets persist, then there will inevitably be a knock-on for retail and business customers in terms of the availability and the price of credit,” Casey told an Irish Bankers’ Federation conference in Dublin last week.
IIB Homeloans, which has 11 per cent of the mortgage market here, said: ‘‘If the situation continues where the Euribor cost of funds remains high, then all banks will have to increase their tracker margins.”
A number of British banks have already passed on higher borrowing costs to customers, despite the Bank of England’s policy of keeping interest rates on hold in recent months.
Rates were increased by up to 0.2 per cent on typical standard variable-rate mortgages, while some banks also increased the rates on tracker mortgages for new customers by the same margin.
In Ireland, the rates on home loans for new borrowers may also come under pressure. However, existing tracker mortgage customers cannot be hit as their rates are tied to the ECB rate, which has not changed.
Many bigger business customers are already facing higher repayments as their loans are often tied directly to money market rates.
Fears over the impact of the credit crisis were exacerbated on Friday by news that the Bank of England had intervened to guarantee emergency funding for British mortgage lender Northern Rock.
Northern Rock, which has 25,000 Irish customers that have saved €2.5 billion through its phone and internet banking operation here, ran into difficulties after it failed to obtain funding from other banks and risked running out of cash.
The bank has assured customers that their savings are safe, but this was not enough to prevent hundreds of customers queuing at its Dublin office on Friday to withdraw their money. Northern Rock has no mortgage customers here.
Many Irish bankers expressed shock last week at the rapid turn of events in the credit markets and the wide gap between official base rates, set by the ECB, and the rates being charged on the interbank market.
The money market rates at which the banks borrow funds have risen by up to half a per cent over the past few weeks.
A spokesman for Halifax, which was one of the British banks that increased rates last week, declined to comment when asked if its Irish subsidiary was likely to follow suit. An AIB spokesman said the bank had ‘‘no current plans’’ to increase mortgage rates.
Earlier this month, Start Mortgages, which lends to customers with poor credit histories, increased its rates by 0.5 per cent after experiencing a sharp increase in its borrowing costs.
