Fianna Fáil Finance spokesperson Michael McGrath has expressed his disappointment at an apparent lack of willingness on the part of the European Central Bank (ECB) to take action to ensure that the full impact of its policies are felt by consumers and businesses in Ireland and the Eurozone generally.
The ECB took over the role of formal role of oversight of the main Irish banks in November 2014 as part of the Single Supervisory Mechanism. In communication with the ECB President, Deputy McGrath highlighted that the interest rates being charged by Irish banks to households and SMEs are significantly above the Eurozone average and a pattern has emerged where the benefit of reductions in the ECB base rate and other policy actions are not passed on to personal and business customers.
Deputy McGrath stated, “In essence, a clear disconnect has emerged between the Irish banks’ cost of funds sourced from deposits, the wholesale market and the ECB, and the rates they charge variable rate customers. In response the ECB President indicated that no direct action will be taken by the ECB to address the issue stating “The ECB does not interfere in the normal activity of commercial banks in pricing loans,” and that “the ECB’s actions are solely motivated by the need to attain monetary policy objectives.”
“While highlighting a range of policy initiatives that the ECB has taken, President Draghi declined to say how they would ensure that the impact is effectively transmitted to the real economy. The ECB is effectively leaving it up to the banks to decide if customers will benefit from ECB policy decisions. Following his appointment, Mario Draghi brought a new determination to the ECB to tackle the weakness in the Eurozone economy. While I do not question his continued commitment in this regard, the effectiveness of ECB policies needs to be examined. The Eurozone economy continues to teeter on the brink of a renewed recession with sluggish growth of just 0.2% in the third quarter of 2014. Ireland is more exposed than most countries to international economic developments.
“The purpose of ECB rate cuts, bond buying and the long term financing it has embarked on is to reduce the cost of credit for consumers and businesses and, in so doing, to provide a stimulus to the real economy. However, what appears to be happening in practice is that the most significant beneficiaries have been investors with massive appreciation in asset prices. By contrast, mortgage holders have seen standard variable rates rising steadily in recent times.
“While attention is often focused on the availability of credit, the biggest issue for SMEs is often the prohibitive cost of bank borrowing. National Central Banks, who in effect implement ECB policy at a local level, have potentially very strong powers of persuasion on these matters. If interest rate cuts and other actions are not resulting in a real reduction in the cost of credit, they are not having the full impact that is intended. The ECB together with the Irish Central Bank need to look again at how its policies and feeding through to families and consumers. Where the desired effect is not currently being felt, it needs to use its considerable power and influence to ensure that it starts to happen.”
Please below correspondence between Deputy McGrath and ECB President Mario Draghi