Finance Minister Brian Lenihan has said he is disappointed by Permanent TSB's decision to increase its variable mortgage interest rate by half a percentage point from next Monday.
But he rejected suggestions that he should withdraw the State guarantee from banks which raised interest rates, saying that this would mean even higher costs for mortgage holders.
He said the Permanent TSB increase reflected 'commercial market realities including the increased cost of accessing funds'. The Minister added that Permanent TSB was paying the State for the benefit of the guarantee.
Earlier, the general president of the SIPTU union, Jack O'Connor, said he would write to Minister Lenihan calling on him to withdraw the Government's guarantee from banks which plan to raise interest rates to mortgage holders.
Fine Gael leader Enda Kenny said the Minister's statement was a 'totally inadequate response'. He urged Mr Lenihan to direct the company's senior executives to reverse the decision.
Permanent TSB is to increase its standard variable mortgage interest rate by half a percentage point to 3.19% from next Monday. The move will affect more than 50,000 borrowers.
The bank, which is owned by Irish Life & Permanent has been under pressure due to the credit crunch. It is losing money in its tracker loans and trying to make up the shortfall by increasing rates elsewhere.
The move will mean monthly repayments on a €300,000 mortgage will increase by €70 a month. Most of the bank's customers who took mortgages over the past five years are on tracker loans, and will not be affected by the move.
While other lenders say they have no immediate plans to follow suit, they will be watching the move closely.
Earlier this week, credit rating agency Fitch downgraded Permanent TSB's parent company Irish Life & Permanent's rating from C to B/C, due to concerns about its profitability over the next two to three years.
The ratings agency said Permanent TSB would probably report a loss this year, and could make another loss in 2010. Fitch said Permanent TSB was suffering from more expensive funding on international markets and could not re-price its loans quickly enough to compensate, resulting in lower revenue from interest.
