Irish central bank would enforce mortgage plan despite reservations

* Bill would give central bank power to cap mortgage rates

* Government against bill but does not have votes to stop it

* Finance minister says new entrants could be put off (Adds comments from central bank's governor, finance minister)

By John Geddie and Padraic Halpin

DUBLIN, May 19 (Reuters) - Ireland (Other OTC: IRLD - news) 's central bank will work to the letter of a proposed law to hand it the power to cap mortgage interest rates if it is enacted, even though it has serious reservations over its impact, the bank's governor said on Thursday.

A proposed law to hand the central bank the power to intervene in setting mortgage rates passed the initial legislative stage in parliament on Wednesday despite objections from the government and central bank.

Central Bank Governor Philip Lane has said he does not wish to be given such powers and last month described a cap on rates as a "very crude instrument with many downsides," including potentially solidifying a lack of competition.

"We don't think having legislative caps is the best way to ensure competition," Lane told reporters after the bill moved a step towards becoming law. "(But) we will work not just to the spirit but to the letter of every law that comes in."

Finance Minister Michael Noonan, part of a new minority government that failed in a bid to put the bill on hold for six months to undergo pre-legislative scrutiny, has said some provisions around property rights appear to be unconstitutional.

He also said the European Central Bank would be consulted on the bill in the next couple of weeks. Lane, who is a member of the ECB's governing council, said consultation should start "as soon as possible so that there can be substantive engagement."

Noonan threatened a similar cap on mortgage rates last year, potentially a vote-winner ahead of the elections. Most banks subsequently cut rates.

He said on Thursday he hoped state-owned Allied Irish Banks (Berlin: 30544177.BE - news) would follow up a rate cut announced last week with another "fairly soon".

Noonan said he did not think uncertainty over the bill would lead to a significant drop in the value of Ireland's banks, but said it could put off new entrants who are showing interest in the market and that competition was the best way to lower rates.

"There are conversations between outside providers and the central bank to be licensed to operate here but I think there'll be a tendency now to hold back until we see what happens with this legislation," Noonan told reporters.

"I would hope that we will get several opportunities to explain the government's position and we're an awful long way from enactment." (Editing by Jason Neely and Mark Potter)