AIB caved in to pressure from the Government and announced that it will pass on the European Central Bank interest rate cut to its variable rate mortgage customers.
The bank said last night that its board had decided to pass on the cut even though its top executives told the Government 24 hours earlier that it would not do so.
The Government last night welcomed the bank's decision. "AIB did not impose the last two ECB interest rate increases, and this latest move by the bank is to be welcomed," it said in a statement.
Taoiseach Enda Kenny and Tánaiste Eamon Gilmore strongly rebuked the bank executives for their stance at a meeting in Government Buildings on Wednesday and later criticised the banks in public.
Mr Gilmore repeated his criticism in the Dáil and called on the banks to reconsider their decision and threatened action if they did not.
Last night, the board of the bank, which is now almost wholly owned by the State, announced the U-turn. Former tánaiste Dick Spring and former head of the National Treasury Management Agency Michael Somers are among the public interest directors on the AIB board.
Executives from Bank of Ireland, in which the State has a minority shareholding, and Ulster Bank, in which it has none, were also at Wednesday's meeting with the Government's Economic Management Council. So far they have not responded to pressure.
A terse statement from AIB last night said: "Following the meeting between AIB, members of the Government and the Economic Management Council, the board of AIB has decided to implement a 0.25 per cent interest rate cut to its variable rate mortgages."
AIB decided to reverse its position as it accepted the reality that the bank was 99.8 per cent State-owned and had to agree to the Government's wishes, a source said.
Despite being initially opposed to passing on the interest rate cut, there was some debate at a board meeting that the bank had to accept that the Government was calling the shots as almost the outright owner of the bank and could also force the bank's hand on interest rates with legislation. "There is no point in fighting a battle the bank is not going to win," said a source familiar with the bank's position.
AIB also accepted after the boardroom discussion that there was a wider importance to the economy of passing on the interest rate cut, particularly with further tax increases and Budget spending cuts imminent.
Some board members were believed to have been concerned that the bank had appeared to be taking on the Government over the contentious interest rate cut.
The cost to the bank of passing on the rate cut is understood to be between €20 million and €30 million, and the argument was made in the bank that this was not significant in the context of the €20 billion that the Government has given it.
