The ECB has raised its deposit rate from -0.5% to 0.75% in less than two months, its fastest pace on record, and another large hike is slated for Oct. 27. Irish banks absorbed the first round, holding their variable or fixed rates.

AIB, one of just three retail banks that remain in Ireland with NatWest and KBC both in the process of shutting their Irish operations, said the increase will also apply to its EBS and Haven subsidiaries.

While AIB's main rivals Permanent TSB and Bank of Ireland have yet to move, non-bank mortgage lenders in the market - ICS Mortgages, Avant Money and Finance Ireland - have increased the cost of mortgage products in recent weeks.

Irish homeowners have increasingly switched to cheaper fixed rates in recent years. The lowest fixed rate now on offer for new customers at AIB, the country's largest mortgage lender, is Haven's 2.5% four-year rate applying to energy efficient homes.

The average interest rate across all new Irish mortgages was 2.64% in August, central bank data showed on Thursday. While still higher than the euro zone average of 2.21%, the gap has closed significantly in recent months.

AIB said it also plans to offer customers a rate of 0.25% if they place at least 15,000 euros on deposit for a one-year fixed term from next month.

(Reporting by Padraic Halpin; Editing by Kirsten Donovan)