Minister for Finance Michael Noonan has reserved the right to impose a levy on banks in the October budget if mortgage rates are not cut this summer.

After two days of talks with bank chiefs in his department, Mr Noonan will today instruct officials to keep the situation under review and revert to him in advance of the budget.

The development is being cast as a warning to the banks the Government expects action by July. The nationalised Allied Irish Bank indicated after meeting Mr Noonan on Tuesday that rates were on a “downward trajectory”, fuelling anticipation it might follow two recent rate cuts with another.

Other lenders are expected to follow but some may cut fixed rates in preference. Mr Noonan has urged the banks to extend any reduced mortgage pricing to customers whose loans are in negative equity, something they are likely to do.

But the specific intentions of individual lenders remain unclear. Although AIB’s main rival, Bank of Ireland, is reluctant to cut its variable rates, BofI may yet have to move to preserve its position in the face of increased competition from its biggest competitor.

BofI chief Richie Boucher was among the bankers who met Mr Noonan yesterday. The meeting came on a day when analysts at HSBC cited political pressure on BofI when reiterating “reduce” guidance. HSBC has a target price of 30 cent on BofI shares, which closed down 2.5 per cent last night at 35.5 cent . As a result of pressure to cut rates, HSBC said BofI’s earnings per share could decline by up to a mid-single digit.

“For some months there has been growing public pressure on the Irish banks, from the Central Bank and politicians, to cut their mortgage rates and in particular standard variable rates, the latter typically in the 4-4.5 per cent range.” According to HSBC, banks could be seen to be bowing to political pressure if they agree to cut rates in coming weeks. This would leave them “wide open” to being forced to make further cuts in future.