Financial Services Ireland (FSI), which represents the interests of the financial services industry, has said IFSRA's recent comments on interest rate cuts undermine industry confidence in the new regulatory framework.

FSI was referring to comments made by the new financial services regulator, IFSRA, that it did not believe the banks had no room for manoeuvre on cutting interest rates after last week's decision by the European Central Bank to reduce official rates.

"While acknowledging that it is legitimate for IFSRA to comment on issues that are in the consumer and public interest, these comments compromise the legitimate right of financial institutions to respond to the competitive environment," Ms Aileen O'Donoghue, director of FSI, said yesterday.

"FSI is concerned that IFSRA should attempt to assert such a direct role in the setting of interest rates by financial institutions, a role which does not appear to be contemplated in the existing statutory framework.

"This type of approach undermines industry confidence in the new framework and is a serious matter," she added.

Lending institutions have come under growing pressure to pass on to borrowers the full half percentage point cut announced by the ECB last Thursday.

To date, only IIB Bank has announced cuts to its lending rates although the ECB rate cut had been widely expected in the financial markets for some time.

Aside from IFSRA, the Tánaiste, Ms Harney, said she expected all financial institutions to pass on the full cut to borrowers. Last week, she said: "I'll be very disappointed, surprised and angry if it wasn't passed on. In a competitive market, that is what you would expect."

But on RTÉ radio yesterday, the Minister for Finance, Mr McCreevy, appeared to suggest the issue was one best left to market forces.

Noting that no government in the European Union had control of the rate of interest the banks lend at, he said the issue would be resolved by competition with some of the small banking institutions likely to pass on the full rate cut.

"People should shop around, not alone in the area of mortgages," he said.

Meanwhile, the FSI said financial institutions were obligated to "balance the interests of borrowers, savers and shareholders."

It said it was important that the financial regulator reflected the reality of this position and questioned IFSRA's commitment to further developing consumer understanding of financial markets and products.