Independence and Interest Rate Setting – The Irish Banks 1952-1970

"Between 1922 (when the Irish Free State was founded) and 1979, the Irish pound was linked one for one and was freely convertible into sterling. Consequently the impetus for changing Irish interest rates came from changes in the (Bank of England) Bank Rate. The Irish Banks Standing Committee (IBSC) was formed in March 1920 “to fix rates for Overdrafts, Loans and Discounts for all banks” (IBSC Minutes, March 16th, 1920). In the 1920s and 1930s, the Irish banks adopted a fixed schedule, which they followed for each change in the Bank Rate. By the beginning of the 1950s the schedule was abandoned as it was no longer deemed to be relevant and it was decided by the IBSC that any change in Irish interest rates, following a change in the Bank Rate, would no longer be automatic but would be a decided by the IBSC. This paper analyses the reasons behind the changing relationship between Irish interest rates and the (Bank of England) Bank Rate during the 1950s and 1960s. The independence that the IBSC had previously enjoyed in setting their retail rates began to be eroded as a number of other players, the Central Bank and the Irish Government, started to influence the way that interest rates were set while other factors, besides purely banking considerations, entered into the interest rate decisions. The contents of the Minutes of the meetings of the Irish Bank Standing Committee for the 1950s and 1960s are used to analyse the role of the three agents, the Irish Banks Standing Committee (Irish banks), the Central Bank and the Irish Government in setting retail interest rates. The paper analyses the economic and political reasons for the Irish government’s interference in setting interest rates. The mid 1950s was characterised by economic stagnation. This was followed by the emergence of economic planning in 1958 to combat problems of high unemployment and emigration. The paper examines the emerging and evolving relationship between the Irish Central Bank and the banks. While initially the Central Bank played a minor role as mediator between the banks and the government, during the 1960s the commercial banks began to recognise its potential role as a protector against government interference. The paper highlights the “threats” that were invoked by different governments, at different times, to get the banks to behave more in line with their wishes and why government was willing to incur the cost of interference in banking activities, in order to achieve their objectives. It also documents how the banks responded to these threats. It demonstrates how the banks used their role as lenders to the government to try to retain their independence in setting retail interest rates according to their own banking criteria. "