The European Central Bank's move last Thursday to reduce interest rates actually took analysts by surprise. While most expected a cut, they thought it would be just a quarter of a percentage point. Hardly anyone was betting the ECB would bring the rate down by double that amount.

But if the ECB's move raised eyebrows, the reaction of the Irish lending institutions was predictable. Instead of passing on to borrowers the full benefit of the new rate of 2.5 per cent, the Republic's banks and building societies announced changes that fell significantly short of this.

Irish lending institutions are now the greediest in the EU. Irish, German, Belgian, Dutch and other euro-zone banks all buy money at exactly the same price, 2.5 per cent. Borrowers throughout the new single currency area typically pay around 1.5 percentage points above the ECB rate more for their mortgages - except in the Republic, where the banks and building societies have simply decided to charge up to 3 percentage points extra, and pocket the difference.

So while everyone else in the euro zone can get a variable rate mortgage for between 4 and 4.5 per cent, the Irish wind up paying at least 5 per cent, and usually closer to 6 per cent.

This is real money. A home owner with a £75,000 mortgage at, say, 4.25 per cent, over 20 years will have monthly repayments of £464 a month. The same home owner on 6 per cent interest will pay £537 a month. That works out at £876 extra every year, enough for a decent holiday.

The banks and building societies spent much of the past week defending their high margins, insisting that they needed to take the extra money from borrowers to give more to people with deposit accounts. In fact, all European banks have depositors, and have found ways to attract their cash through better financial products. These banks are not loss-making.

The problem for Irish mortgage holders is that there is no serious price competition for their business. While the banks and building societies advertise every day about how friendly their staff are, or how convenient their telephone hotlines are, or how accommodating they are of first-time buyers, not one is willing to give customers a variable mortgage at 4 per cent.

If all of the retailers of, say, video recorders, charged exactly the same price for each model, and made double the profit of their counterparts across the rest of Europe on every sale, those stores would be open to an accusation that they were running a cartel.

While there is no suggestion that Irish banks have met in secret and fixed their prices - that, of course, would be illegal - it must be obvious to all of them that so long as no bank or building society breaks ranks, each can continue to charge the highest rates in the euro zone and not lose business.

But this happy situation for the Republic's lending institutions may not continue indefinitely. For some months - since the single currency began in January - there have been vague rumours in the banking sector that a large and well-established German bank was about to enter the Irish market.

Its initial strategy would be to eliminate most of the risk of operating in an unfamiliar market by offering home loans only to those who already have more expensive mortgages elsewhere, and who have already paid off at least 25 per cent of the value of their houses.

With the Irish housing market still expanding, such a development is likely to happen sooner or later. For this reason, even though the ECB rate is probably as low as it will go, home owners might be wise to wait a few months before locking in to a fixed rate mortgage.

In general, mortgage holders in the Republic should be grateful that it is the ECB that sets mortgage rates, not the old Irish Central Bank. Irish economists, including those at the Central Bank, spent the past 18 months arguing that inflation would soar in the Republic because rates were being kept "inappropriately low" as a result of EMU.

ALTHOUGH few have admitted it in public, these economists were absolutely wrong - despite low interest rates, inflation has remained at around 3 per cent.

Home owners would have paid a heavy price for this mistaken view. Had the Irish Central Bank had its way, mortgage rates would have been pushed up to at least 8 per cent, to stave off an entirely imaginary threat of inflation.

Perhaps the banks would at this point have informed deposit account holders that they would receive lower interest payments, in order to keep mortgage rates for home owners artificially low, but this seems unlikely.