The Central Bank believes a proposed law to hand it powers to intervene in setting mortgage rates may have a range of damaging side effects but it would have a duty to use the powers if enacted, a senior official said. 

The bill, which aims to force banks to reduce their variable rates, passed the initial stage in May despite objections from the Government. 

The Central Bank had consistently said it should not be given such powers and joined the Finance Minister Michael Noonan, the European Commission and the European Central Bank in criticising its likely effectiveness. 

"Short term fixes may have long term negative consequences for consumers," Ed Sibley, Director of Credit Institutions Supervision at the Central Bank, told the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach today.

"We are concerned that the bill focuses on the symptoms of a complex problem and may, therefore, not only be unsuccessful but runs the risk of being counter-productive, as it may have damaging side effects on the functioning of the market," he stated.

Mr Sibley said rates were comparatively higher in Ireland due to a lack of competition, a default rate 10 times higher than in most euro zone countries and uncertainty over the recoverability of collateral due to the low level of repossessions. 

As well as failing to tackle those causes, capping rates may stifle the prospects of any new entrants coming into the market, limit mortgage availability to low-risk customers and lead to a rise in rates, fees and commissions on other products, he said.