ECB warns against mortgage rate setting role for Irish central bank

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FRANKFURT, Nov 18 (Reuters) - A draft law that would give the Irish central bank the power to intervene in the setting of mortgage rates could cause conflicts of interest and damage the Irish banking sector, the European Central Bank said in an opinion published on Friday.

The bill was proposed in May by Ireland (Other OTC: IRLD - news) 's main opposition party following complaints that the country's banks were charging some of the highest variable rates in the euro zone and it is currently being considered by a parliamentary committee.

The Central Bank has indicated it does not want the powers, with Governor Philip Lane describing a cap on mortgage rates as a "very crude instrument".

The European Central Bank, which was asked by the parliamentary committee to consider the bill, said the new law could have several unintended side effects, including prompting banks to charge higher interest rates on other products and to ration the amount of mortgage loans to higher-risk customers.

The law could discourage new mortgage lenders from entering the market and damage competition, it said.

"The ECB would like to emphasise that extreme caution should be exercised when transferring the power to take commercial decisions from market actors to public authorities," the ECB opinion said.

The ECB also warned of possible conflicts of interest as cutting mortgage rates could potentially undermine the profitability of banks and the stability of the sector, which the central bank is charged with protecting.

Such a conflict of interest "may potentially have an impact on the institutional independence of the Central Bank of Ireland and the personal independence of the governor," the ECB said.

Prime Minister Enda Kenny's coalition last year used its majority to vote down a similar proposal.

But his new minority government controls just 59 of parliament's 157 seats, leaving opposition parties with enough votes needed to pass legislation if they act together. (Reporting By Francesco Canepa and Conor Humphries, editing by Larry King)