Just days after Taoiseach Enda Kenny signaled moves would be taken to deal with lenders in the October budget because of their refusal to make substantial cuts to variable mortgage rates, Brussels declared such action could undermine the financial sector.

Opposition TDs insisted Government threats to take on the banks were always empty and Finance Minister Michael Noonan would now use the European Commission report as cover to do nothing after claiming lenders had moved on the issue.

The EU intervention will come as bad news for some 300,000 households in Ireland paying 2% more than the average eurozone borrower.

The Government was accused of not having the guts to take on the banks by Ross Maguire, founder of the New Beginnings organisation which supports mortgageholders in distress.

“Mr Noonan appears to be almost backing down by saying that banks have moved,” said Mr Maguire. “In real terms they have hardly moved at all. The reality is 300,000 people are being punished by the banks, who in the Taoiseach’s words, are acting immorally.

“I don’t think the European Commission really gets what is happening in Ireland. The Government should just ignore their report.”

A post-bailout draft report by the commission states that Irish banks need to be given sufficient leeway to set interest rates so as to increase stability and attract new entrants to the market.

The Brussels assessment finds interest rates in Ireland comparatively high, but says this is due to the amount of non-performing loans.

Mr Kenny indicated in the Dáil last week that direct action could be imposed on lenders in the autumn as he accepted present rates were not morally justifiable.

Fianna Fáil finance spokesman Michael McGrath said Mr Noonan would now use the EC report to try and “shut down” debate on the issue.

“The finance minister’s threats always appeared empty and he will now do nothing to end these extortionate interest rates. Mr Noonan has completely given-up on this issue. The banks have won the day again,” Mr McGrath said as he introduced legislation to give the Central Bank powers to intervene with lenders to force them to cut rates.

Speaking on RTÉ, Mr Noonan said: “The Irish Central Bank is in exactly the same position as the commission, they have given the same advice in a written report, but I have met with six main lenders now and they have all moved and I think people need now to look at the competitive rates. I think there’s a great case to made for switching from one mortgage provider to another and also a case to be made for fixing loans. I believe we are at the bottom of the interest rate cycle.”

Mr McGrath told the Dáil that a 1% cut in the variable rate would save Irish householders some €400m a year.

Mr Noonan gave the main banks a deadline of the beginning of July to cut rates after indicating levies could be imposed on them if they failed to respond adequately.

Opposition parties said the banks ignored the minister’s call as they believed he would not act against them.

The European Commission report noted that the court system was slow to deal with repossessions, but said that a surge in such cases was not expected.

Commissioners praised the Central Bank’s controversial plans to insists on deposits of 20% for mortgage loans above €220,000 to prevent another boom and bust.

The commission said there was scope to increase property tax due to rising house prices, but signaled that political reluctance to move in this area was likely to see things remain as they are.

The report found uncertainty about Government plans on universal healthcare, and noted the drugs bill remained high for the HSE.