Central Bank confirms Irish lenders slower to pass on rates to savers 

Irish individuals who have money deposited in banks are not benefiting from the increasing interest rates in Europe. The Central Bank of Ireland has provided initial proof that Ireland is not effectively implementing the European Central Bank's (ECB) monetary policy in terms of overnight deposit rates, particularly for households.

Included in its series of Economic Letters, the Central Bank has discovered noteworthy differences among loan and deposit offerings in Ireland when compared to the rest of the euro area. In fact, both business and household overnight deposits are now even more feeble than they were previously.

Following a year of the European Central Bank (ECB) increasing interest rates in an assertive effort to address the surging inflation, another development is anticipated. Beginning in July 2022, the ECB has raised its borrowing rates by 425 basis points, and further escalation is expected next week.

Studies also indicate that overnight investments in Ireland are significantly lower compared to other nations, with a vast majority of Irish individuals - approximately 94% - maintaining funds in these types of accounts.

Throughout the previous year, Irish financial institutions have been noticeably sluggish in increasing interest rates for depositors. The government has consistently urged banks like AIB, Bank of Ireland, and Permanent TSB to enhance their customer benefits in response to this situation.

At the present moment, the Central Statistics Office has reported a near doubling of mortgage rates. The Central Bank paper reveals that although Ireland has not experienced as significant an increase in mortgage rates as other nations, the impact on Irish borrowers seems to be consistent with past patterns.

Even though the progress has been happening at a slower pace, mortgage rates in Ireland have still managed to surpass the average rates in the euro area. According to data from the Central Bank, Irish rates reached an average of 3.8% in July this year, exceeding the mean rate of 3.7% across the 20 countries in the euro area.

In the blog section, it was mentioned by Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, that Ireland's banks are becoming more consolidated. Madouros also pointed out that Ireland has experienced lower interest rate transmission for deposits and new mortgage rates in comparison to other countries in the euro area.

Possible factors influencing these trends include the abundant amount of deposits in the Irish retail banking sector and the changing competitive landscape of the banking industry.

For a long time, the absence of sufficient banking rivalry has been linked to elevated interest rates. This connection has become more apparent in the Irish banking industry due to the recent withdrawals of KBC and Ulster Bank, resulting in a greater concentration.

With decreased competition, several longstanding practices have undergone transformations. The transmission of overnight deposits, for instance, has weakened compared to earlier periods, whereas business-term deposits seem to be more robust in the current cycle compared to past cycles.

Mr. Madouros reiterated that it is crucial to ensure the successful transmission of the European Central Bank's monetary policy to the local economy through the banking system in order to effectively combat inflation.

Based on past trends, we anticipate that the transmission of monetary policy through the banking channel will further improve in the upcoming months. We will diligently observe the transmission process through various indicators and analysis methods.

Only a week ago, the major banks in Ireland raised the rates for people who save their money. Now, there are some savings plans that can give you up to 3% on specific amounts for certain periods of time. However, there are also people who disagreed with this decision. They believe that the increase was not sufficient, and it should have included more types of savings products.

Acknowledging initial indications of monetary policy transmission, the Central Bank stated that a comprehensive evaluation will be feasible in the forthcoming months, encompassing "any variations in the interest rates of commercial banks" post-June 2023.