The Central Bank of Ireland has highlighted a weaker transmission of the European Central Bank's (ECB) monetary policy in Ireland, particularly to household overnight deposit rates. This comes amid a series of ECB interest rate hikes initiated in July 2022, aiming to counteract the persistent inflationary pressures in the euro area. The ECB's key interest rates have seen a sharp increase of 425 basis points since then.
In a recent Economic Letter series, the Central Bank found significant variations across loan and deposit products in Ireland compared to the euro area. The pass-through to household deposits and new mortgages rates has been weaker in Ireland relative to the euro area as a whole. Despite these trends, Irish mortgage rates managed to exceed the euro area average, hitting a 3.8% average compared to the 20-state mean of 3.7% in July this year.
Deputy Governor of the Central Bank of Ireland, Vasileios Madouros, underscored the importance of understanding how long and how variable the lags of monetary policy will be in this tightening cycle. He noted that potential factors driving these trends include the relatively ample deposit base of the Irish retail banking system and the evolution of competitive dynamics within the market for banking services.
The research also revealed that overnight deposits are considerably weaker in Ireland than in other countries, with about 94% of Irish savers holding money in these accounts. Over the past year, Irish banks have been slow in passing rising deposit rates onto savers, leading to sustained pressure from the government on major banks such as AIB, Bank of Ireland, and Permanent TSB to increase their offerings for customers.
Madouros emphasized that effective transmission of ECB's monetary policy to domestic economies via banking systems is crucial in combating inflation. "Given historical patterns, we expect the banking channel of monetary policy transmission to continue to strengthen in the months ahead," he said.
The Central Bank also noted that recent weeks have seen several announcements from domestic retail banks signaling changes to their deposit interest rates. These higher advertised rates will take time to feed through to official measures of interest rates received by customers on their deposits.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.