Monday 5 December 2016

ECB boss Draghi downplays interest rate cut in near term

Laura Noonan and Charlie Weston

Published 13/01/2012 | 05:00

ECB president Mario Draghi announcing at a briefing yesterday that the central bank was leaving interest rates unchanged. Photo: Reuters
ECB president Mario Draghi announcing at a briefing yesterday that the central bank was leaving interest rates unchanged. Photo: Reuters

MORTGAGE-holders could still be in line for an interest rate cut in March or April, despite central bankers yesterday deciding to leave rates on hold.

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Homeowners had been expecting a January cut from the European Central Bank up to recently.

But the success of a €489bn funding operation for eurozone banks has prompted officials to hold off for now on another rate reduction.

Economists said that moves to increase the funding for banks by the ECB were working better than expected, which meant there was less of an urgency for a rate cut.

Some €500bn has been pumped into the eurozone banks after the funding rules of the ECB were eased last month.

The success of this bank-funding operation caused head of the ECB Mario Draghi to downplay hopes of more immediate rate cuts this year, but he did not rule out reductions in the next few months.

The ECB's top bosses, including Irish Central Bank Governor Patrick Honohan, yesterday voted unanimously not to follow up November and December's interest rate cuts with a third reduction this month.

The news will come as a blow to those on tracker mortgages, who see their payments reduced by about €15 for every €100,000 they have outstanding. Some variable-rate mortgage holders also benefit from cuts if their banks pass them on. Mr Draghi yesterday stressed that the ECB's governing council was "never pre-committed" on future interest rate decisions and that the situation across Europe was one of "high uncertainty".

But his comments to media suggested that an imminent interest rate cut was highly unlikely.

The ECB typically only cuts rates when it is sure that the resulting increase in cash in consumers' pockets won't push inflation beyond the ECB's target level of "close to but below 2pc".

Expectation

Yesterday, Mr Draghi said it was the ECB's expectation that inflation rates would remain above 2pc "for several months to come" -- implying a cut was unlikely over that period.

There was a glimmer of hope for homeowners over the medium term, though. Mr Draghi yesterday refused to rule out reducing rates beyond their record low of 1pc and said the ECB expected inflation rates to dip below 2pc later in the year, something that may prompt a rate cut.

The higher inflation and tentative recovery that denied us another rate cut is partly because of the euro's recent weakness against key currencies like the dollar, a phenomenon that boosted exports from eurozone countries and ultimately put more money in the pockets of those countries' consumers.

KBC Bank economist Austin Hughes said he did not now expect a rate cut until April or May.

"Mario Draghi downplayed any sense of a rate cut in the near term. But he cautioned that there were still risks for the eurozone economy," Mr Hughes said.

Rates dropped by 0.25pc in November and by the same percentage again last month.

The combination of the two cuts meant repayments came down by €30 a month for every €100,000 borrowed.

Ulster Bank's John Fahey said he would not rule out another drop in rates in February, but it was more likely to come in March.

Irish Independent

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