Local banks did not commit themselves to a reduction in lending rates following the European Central Bank’s decision to cut its benchmark refinancing rate to a record low.

The refinancing rate is set to be decreased by 25 basis points to 0.5% and its marginal lending rate reduced by 0.50 basis points to 1.00%, with effect from tomorrow.

The bank lending rate is the average rate of interest charged on loans by commercial banks to private individuals and companies.

The ECB slashed interest rates over the past four years to make credit available to businesses and encourage growth.

The cuts come after the desired effect was not produced the last time the interest rate was reduced.

Despite local banks have followed suit at times, most of the time they ignored the ECB’s interest rate cut and did not lower their interest rates. Banks are not obliged to reduce the rates, or increase them for that matter. The last time the banks increased their lending rates was back in 2007 following the ECB’s decision to increase interest rates.

This time around, the ECB left its deposit rate at zero, cutting its key interest rate to a record low, and interest rate on its main refinancing operations of the Eurosystem was decreased by 25 basis points to 0.50%.

The decision was made by the ECB governing council at the monetary policy meeting held in Bratislava, Slovakia last Thursday.

ECB President Mario Draghi isn’t ruling out more central bank action to help the lagging eurozone economy, even after the bank cut its key benchmark to a historic low.

When contacted by The Malta Independent online, Portuguese-owned Banif Bank (Malta) said the bank is currently analysing the market situation and any developments that may ensue, in the best interest of its clients.

On the other hand, Bank of Valletta said it has to manage both sides of its balance sheet and any changes in interest rates have to be reflected on both its assets as well on the liabilities side.

Vanessa MacDonald, head of BOV’s communication office, stated that it would clearly not be sustainable to reduce interest rates on the lending side without reducing the interest rates on deposits.

“There is a fine balance to be reached and the bank is continuously evaluating its position.”

A spokesman for HSBC Bank Malta meanwhile said that on following the ECB’s 2 May decision to reduce its rates by a quarter of a percentage point to 0.50%, the bank is pleased to advise that it offers the lowest mortgage rates in Malta and is actively focused on the first-time buyers market.”

A spokesperson for APS Bank said that currently, the bank's base rate is that of 2.35% and the bank does not intend adjusting it for the time being.

A spokesman for Lombard Bank meanwhile said that the bank is currently reviewing the situation.

In June last year, banks ignored the ECB’s interest rate cut, whose intention primarily was  to boost a eurozone economy weighed down by the global debt crisis. 

The cuts coincided with action from other major central banks, with the Bank of England adding another £50bn in stimulus money and the Bank of China cutting its key interest rates.

Back in 2008, major retail banks reduced their interest rates following the ECB’s decision to lower its refinancing rates by 50 basis points to 3.25 per cent - the lowest since 2006.

At the time, HSBC Bank reduced its base rate for all lending, except mortgages, to 3.55 per cent. The base rate for the bank's variable mortgage lending was lowered to 3.35 per cent.

BoV had lowered the savings accounts rate by 0.25 per cent resulting in an interest rate of one per cent and interest rates on all other euro-denominated deposit accounts were also lowered.

The mortgage base rate was reduced 0.50 per cent to 3.25 per cent and the base rate for commercial loans, overdrafts, personal loans and credit card accounts to 3.45 per cent.

Addressing a meeting of the Malta Council for Economic and Social Development recently, GRTU president Paul Abela called on domestic banks to reduce their interest rates for lending facilities to Maltese businesses.

He suggested banks take their cue from the interest rate cuts announced by the European Central Bank.

Late last year, then finance minister Tonio Fenech also urged banks to lower their interest rates on loans however pointed out that there were no regulations to impose an adjustment to the rates.