ECB prompts hopes of an interest-rate cut in January
Published 16/12/2011 | 05:00
THE European Central Bank said yesterday inflationary pressures will ease next year, prompting hopes that it will go ahead with an expected 0.25pc cut in eurozone interest rates next month.
Economists said they now expect a rate cut in January, with another one likely before March.
Comments by the ECB were made as new figures show that inflation in the eurozone stayed at 3pc for the third month in a row.
And key bank-to-bank lending rates fell further yesterday due to higher levels of liquidity in the European banking system.
The ECB said inflation pressures in the euro area should slow next year as the sovereign-debt crisis damps growth.
The Frankfurt-based ECB said in its monthly bulletin yesterday: "The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks.
"In such an environment, cost, wage and price pressures in the euro area should remain modest over the policy-relevant horizon. Inflation is likely to stay above 2pc for several months to come, before declining to below 2pc."
Last week the ECB delivered an early Christmas present to 410,000 tracker-mortgage holders when it cut its benchmark interest rate to 1pc.
But four banks -- Ulster Bank, AIB, National Irish Bank and KBC Bank -- failed to pass on the reduction to their variable-rate customers. However, AIB has the lowest variable rate in the market.
There are 255,000 households with variable rates. Other lenders did pass on last week's ECB cut to variable customers.
Many economists feel another rate cut is on the cards when the ECB meets on January 12 next.
Yesterday, the ECB slashed its 2012 growth forecast to 0.3pc from 1.3pc and predicted inflation will slow to an average of 2pc next year, and 1.5pc in 2013 from 3pc.
"Downside risks notably relate to a further intensification of the tensions in euro-area financial markets and their potential spillover to the euro-area real economy," the ECB said, adding that the global economy "may be weaker than expected".
Goodbody's Dermot O'Leary said he expects the ECB rate to fall to 0.5pc before March next year.
A cut of 0.25pc is likely in January, with another of the same size in either February or March.
He said that markets had priced in a fall in inflation in the eurozone, with a risk of deflation.
This was reflected in another fall yesterday in three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending.