AIB has challenged Government calls for financial institutions to pass on the full 0.5 per cent European Central Bank (ECB) rate cut to customers, saying this will always be a commercial decision.

Yesterday, AIB's head of retail banking, Mr Donal Forde, defended its decision only to partly reflect the lower ECB rates, saying it was still offering the cheapest variable rate mortgage. "I can only interpret those political comments as the Government trying to make sure they can get as good a deal for consumers as possible. AIB is doing more than its bit in that regard."

Mr Forde added that the bank had to absorb higher insurance costs and staff and other costs to support its mortgage business and would always take this into account when deciding on the scale of a rate cut regardless of political utterings. "There is only so far that any commercial institution can go. Commercial imperatives have to be met regardless of what the politicians say."

Financial institutions, including AIB and Bank of Ireland, are continuing to cut mortgage rates, with most passing on the full half of one percentage point reduction in ECB rates to their customers. So far, AIB is the only financial institution to have cut rates by less than the ECB reduction, dropping its variable mortgage interest rate by 0.38 of one percentage point to 3.3 per cent, the lowest rate available. This rate will apply from June 16th.

Banks and building societies came under unprecedented pressure from the Government to pass on the full 0.5 of a percentage point drop in ECB rates.

Yesterday, ECB president Mr Wim Duisenberg said there was still room for further interest rate cuts. "We have not yet reached the end of the line. We still have room to manoeuvre," he said. The ECB will meet again to review interest rates on July 10th.

Responding to last week's reduction in the key ECB rate to 2 per cent, Bank of Ireland cut its mortgage rates by 0.5 of a percentage point to 3.6 per cent, leaving it 0.3 of a percentage point above AIB. The EBS Building Society has moved to bring its rates closest to those of AIB by cutting its rate from 3.85 per cent to 3.35 per cent from July 1st.

Other institutions to announce lower rates yesterday were First Active, Ulster Bank and the Bank of Ireland-owned building society, ICS, bringing their rates to around 3.5 per cent.

Bank of Ireland was the only bank also to announce reductions in its savings and other loan rates.

Customers with a Special Savings Investment Account (SSIA) with a variable rate of interest will bear the full impact of the 0.5 per cent cut in ECB rates as this deposit rate falls to 2 per cent. The rate of interest paid on demand deposit accounts will fall to as low as 0.02 of a percentage point following the rate cut.

Bank of Ireland has also reduced the interest rates charged on personal loans, overdrafts and other loans but by substantially less than 0.5 of a percentage point. Personal loan interest rates will fall by 0.1 of a percentage point to 10 per cent, overdrafts will be reduced from 11.75 per cent to 11.65 per cent.

Business customers will see slightly bigger falls in overdraft rates with the bank shaving 0.2 of a percentage point off the rate to 8.95 per cent. The Irish Small and Medium Enterprises Association (ISME) accused financial institutions of profiteering through charging expensive interest rates to business customers. ISME chief executive Mr Mark Fielding called on the banks to pass on the full ECB reduction to the business sector.

"On average, small businesses are charged 8-10 per cent for their lending facilities... the cost of business borrowing remains exorbitantly high," he said.