Business Property & Mortgages

Saturday 23 August 2014

Homeowners suffer after ECB's U-turn on interest rate cut

Charlie Weston Personal Finance Editor

Published 11/01/2013 | 05:00

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uropean Central Bank (ECB) President Mario Draghi. Photo: Reuters

HOMEOWNERS have been dealt a new blow as the European Central Bank has reversed course and dampened expectations of a cut in interest rates.

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There had been strong signs that the key ECB rate would be cut in February or March.

Any cut would be a massive benefit to the 375,000 homeowners who have tracker mortgages as every cut in ECB rates translates into cheaper monthly repayments.

But ECB president Mario Draghi (inset) said the euro-area economy will slowly recover this year as the region's bond markets stabilise after three years of turmoil. There were few risks inflation would rise.

He said the governing council of the ECB, which includes the Central Bank's Patrick Honohan, had been unanimous at its meeting yesterday in deciding not to cut rates.

"There was no request to have a rate cut," Mr Draghi said in Frankfurt.

He said there will be no growth in the eurozone until the end of the year, but so many indicators had improved that there was now a "positive contagion" effect at work in the region.

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But he did not completely rule out a rate cut. He warned that the "real economy continues to be weak".

Economist with Goodbody Stockbrokers Dermot O'Leary said an improvement in stock markets and bond markets in the eurozone had improved making a new rate cut a remote possibility.

"A rate cut is now less likely than it was at this stage last month. Mr Draghi left the door ajar on another cut, but it is less likely. But the ECB is not about to raise rates either," he said.

KBC Bank economist Austin Hughes said a cut in the next few months was off the agenda unless there is another big downturn in the European economy.

"Mr Draghi certainly does not intend to cut any time soon," he said.

There was a possibility of a reduction in rates before the end of the summer, but it was looking less likely, Mr Hughes said.

The last rate cut was in July, when the key ECB lending rate dropped to a record low of 0.75pc. Each cut of 0.25pc reduces the repayments on a tracker mortgage by €15 a month on every €100,000 borrowed.

Tracker mortgage holders – who make up the majority of borrowers – have to have any changes in the ECB passed on to them as part of their contracts.

Variable rate customers have not been so lucky as there have been a succession of increases in the past few months. Close to 300,000 of those with a mortgage now have variable rate version.

Meanwhile, the Construction Industry Federation took issue with the report issued by international ratings agency Fitch this week predicting that house prices could fall as much as 20pc this year. The federation joined Finance Minister Michael Noonan in questioning the assumptions being used by Fitch.

Irish Independent

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