Mortgage relief as rate rises to tail off
Related Articles
Saturday August 25 2007
THE likelihood of more interest rate increases in the foreseeable future faded significantly yesterday.
In an unprecedented public indication of intent, sources in the European Central Bank (ECB) said they were not set on raising rates.
Up to now, there was widespread expectation of another quarter per cent rise in September, with the prospect of a further one in December.
But there was a significant shift in the ECB's stance yesterday with officials stressing the current financial market turbulence will be the decisive factor in determining if and when rates go up.
The ECB indicated that international markets were misinterpreting its signals.
And a leading Irish economist added to the growing belief that the current interest-rate cycle is at its peak.
Bank of Ireland's chief economist Dan McLaughlin said there would be no more rises in the medium term.
The development represents the best news for consumers in nearly two years.
They have been hit hard by eight rate rises since December 2005, and were bracing them-selves for at least two more rises.
The increases have added more than €300 a month to the cost of servicing a typical new mortgage.
In a marked departure from normal procedure, ECB sources were anxious yesterday to get the message out that that they are far from determined to raise rates next month.
The credit squeeze on financial markets has worsened since August 2, when ECB President Jean-Claude Trichet said that "strong vigilance" was needed on inflation.
This phrase has been used the month before previous rate increases.
Economists had interpreted the phrase as a sign that a quarter percentage point rise to a six-year high of 4.25pc would be announced when the ECB meets next month.
That interpretation was wrong, the ECB official told Reuters news agency yesterday.
The ECB was not set on raising rates in September.
"If there is a normalisation in the markets, a rate hike is still possible. If not, the ECB will wait with the next step," the official said.
Dan McLaughlin said recent concerns about US mortgage defaults and their effect on the wider financial system had sparked a credit crunch.
Banks were unwilling to lend into wholesale money markets for periods longer than a few days.
This had led to a surge in the interest rates which banks charge each other.
A move by the ECB to raise its rates next month would only worsen the situation for banks.
The US Federal Reserve is expected to cut interest rates at its September meeting or earlier.
Dr McLaughlin commented: "We would be surprised if this cut is not a half point move."
The ECB is also expected to take notice of new figures out yesterday which showed that business confidence in the eurozone fell sharply in August, to its worst since the invasion of Iraq began in March 2003.
Economists said the figures -- the results from surveys of purchasing managers at thousands of companies -- looked ominous.
In the past month the ECB has been forced to intervene repeatedly in euro interbank lending markets to lower soaring commercial interest rates -- a consequence of a global surge in risk aversion due to the US sub-prime mortgage crisis.
And yesterday three Asian banks admitted they had heavy exposure to the crisis-hit US home loan sector in a move that reinforced global credit worries.
Investor nerves were kept on edge as Singapore's DBS Group Holdings, state-controlled Bank of China and its Hong Kong subsidiary, BOC Hong Kong, revealed a combined exposure to the US sub-prime mortgage market of almost $13bn.
Jean-Claude Trichet: A profile Business, Page 18
