The European Central Bank's cut in interest rates has sparked controversybetween Irish financial institutions and politicians, writes Siobhán Creaton, Finance Correspondent

Ireland's banks and building societies have passed on most or all of the half percentage point cut in European Central Bank (ECB) rates to their mortgage customers - but only after it appeared that they had been pressurised into doing so.

It's been an uncomfortable week for the Republic's well-paid bankers and many are simply appalled that the public might think that Irish politicians are keeping them honest.

By lowering its key interest rate to 2 per cent, the ECB brought the cost at which financial institutions can borrow funds to lend to customers to the lowest level since the second World War.

The move was designed to stimulate economic growth across the euro zone and to help offset the impact of the strengthening euro on European businesses.

It was a substantial rate cut and, when passed on, brings the standard variable mortgage rate to between 3.3 per cent and just more than 3.6 per cent. This translates into monthly savings of between €26 and €52 on the repayments of a €100,000 to €200,000 mortgage.

In the past three years, the ECB has brought its interest rates down by 2.75 percentage points, announcing reductions of between a quarter and a half percentage point each time.

Irish financials have always responded to the lower interest rate environment but have sometimes been less generous than the ECB with their customers.

The writing was on the wall for them this time when the Tánaiste, Ms Harney, quickly warned banks that they shouldn't profit from this rate cut.

The Minister for Finance, Mr McCreevy, also appeared to give them a nudge, muttering about the bank levy he hit them with in the last Budget.

And on Monday, the Taoiseach, Mr Ahern, reminded the bankers of their "moral obligation" to pass on the full rate cut, and quickly.

The beleaguered bankers can expect further harassment about the high rates charged on personal and business loans in the weeks and months ahead, not to mention the examination of the way they conduct their business by the Competition Authority.

Yesterday, Fine Gael's spokesman on finance, Mr Richard Bruton, noted the pattern that has emerged with each rate cut, where mortgage holders have benefited to a greater extent than personal and business customers.

"Businesses have fared very badly. While interest rates have fallen by 2.75 percentage points since 2000, the reduction in business loans has ranged from between 1.2 and 1.5 percentage points," he said.

The Republic's biggest bank, AIB - along with First Active, which trimmed its rates by 0.46 of a percentage point - was the only one to ignore the Government's call, cutting its mortgage rate by 0.38 of a percentage point to 3.3 per cent, the cheapest rate currently available.

Its head of retail banking, Mr Donal Forde, was the only banker to stick his head above the parapet, saying that AIB would continue to make commercial decisions on interest rates 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," he said.

He noted the unprecedented level of focus from the politicians on the banking sector and was puzzled that Ms Harney seemed to be calling for all of the financial institutions to respond in the same way to the ECB rate cut.

"Politicians want everyone to slavishly do the same thing. That is not the definition of a competitive market. That is price regulation," he added.

In other parts of Europe, it is common for mortgages to be taken out at a fixed rate of interest for the period of the loan, so movements in ECB rates have little impact. The British Chancellor of the Exchequer, Mr Gordon Brown, is currently examining whether this is a better way to avoid boom-to-bust cycles in the British property market.

In passing on rate increases or decreases, financial institutions must weigh up the costs and benefits involved, and this is particularly important for public companies, which have a duty to deliver profit growth to shareholders.

"This has been a rather silly feeding frenzy. It is not possible for a large company to immediately organise a rate cut. We have to look at other products and measure the impact on those. This has not been recognised," one banker explained.

Most were not particularly surprised to hear politicians upping the ante following the spate of bad publicity and accusations of broken promises that have been levelled at the Government.

"If the Government is in trouble and an opportunity comes along, of course they are going to take it. That's life!" one source suggested.

The newly established Irish Financial Services Regulatory Authority (IFSRA) also tried to make its presence felt, following the politicians into the fray. It has no power to direct financial institutions on interest rate policies and was immediately attacked by the banks' industry representative body, Financial Services Ireland, much to the annoyance of many of its members.

IFSRA's consumer director, Ms Mary O'Dea, has signalled that she will carry out a survey of interest rate pass-through on various lending and borrowing rates, which she will give to the Competition Authority.

There is still much scope for Irish financial institutions to improve the cost of personal and business loans and indeed credit cards, which are the most expensive form of finance.

They all argue that mortgages will be most competitively priced because of the relatively low risk involved in lending money which is secured against a property.

Other loans are generally unsecured and are riskier but it is questionable whether a premium of about eight percentage points above the ECB rate is fair.

All of the financial institutions have enjoyed robust growth in this type of lending during the boom years and all claim to have had very few difficulties in terms of bad debts.

No matter how quickly Irish financial institutions respond to rate cuts, they have a much bigger problem - their bad public image.

They have a lot of work to do if they are to ever convince consumers and politicians that they are not ripping everyone off.