Bank of Ireland and First Active have passed on the full 0.5 of a percentage point cut in European Central Bank rates to their mortgage customers. Other financial institutions are expected to announce rate cuts later this week.

Both banks have reduced their standard variable mortgage rate from 4.74 per cent to 4.24 per cent. This rate will apply immediately to new customers. Bank of Ireland has said that existing customer will benefit from the lower rate from January 1st, 2003 while First Active said its reduced rates would apply from December 16th.

The rate cut will mean savings of around €27 a month on a €100,000 mortgage, €40 on €150,000 and €54 a month on the repayments on a €200,000 mortgage.

Neither bank has adjusted its deposit rates and has yet to decide whether or by how much these rates should be reduced.

At 4.24 per cent, Bank of Ireland and First Active have matched AIB's mortgage rate which had been the cheapest.

AIB, which has been very aggressive in winning new mortgage business from its rivals by offering the most competitive rate of interest, is still holding off in cutting its rates.

Senior executives have been reviewing all interest rates in the light of the ECB cut last week. That rate will become effective for all financial institutions from tomorrow as it is the date at which they can borrow fresh funds in the money markets at the new lower rate of interest.

This is the first round of rate cuts in just over a year. Previously the financial institutions quickly moved to cut mortgage rates in a bid to win competitive advantage. This time around they appear to be dragging their feet.

A key issue is what effect the rate cut will have on their profit margins. They will be trying to ensure that deposit rates do not fall much lower to hold onto customer funds. At the same time they are all watching their competitors to gauge whether they should pass on all or part of the 0.5 of a percentage point cut in ECB rates to mortgage customers.

The banks and building societies are also factoring in the impact of a new levy which has been imposed by the Government which could cost them €300 million over the next three years.

The Irish Bankers' Federation, the industry body, will meet Department of Finance officials this week to make a case for the levy to be abolished.