Business World

Monday 27 March 2017

Mortgage cuts on way in bid to lift euro crisis

- OECD calls for urgent reductions
- Desperate push to avert recession

German Finance Minister Wolfgang Schaeuble. Photo: Getty Images

Charlie Weston and Donal O'Donovan

HOMEOWNERS can look forward to a series of mortgage rate cuts in the near future after the ECB yesterday came under pressure to kickstart flagging eurozone economies.

International thinktank the OECD said sharp interest rate reductions were urgently needed to boost economic activity in a region now near recession.



Earlier this month, the ECB reversed its previous policy and cut interest rates to 1.25pc.



Now the strong expectation is that there will be a series of cuts.



Four cuts, including the most recent one, would reduce repayments on a €200,000 tracker mortgage by €120 a month and that would benefit as many as 400,000 homeowners. Economists are expecting a December rate cut with another in January. Further decreases in February or March are also likely.



The Paris-based OECD said the euro crisis was deteriorating rapidly and contagion was spreading. Its chief economist accused EU leaders of being "behind the curve".



The OECD report said the euro itself was now in danger. "There is a risk to the euro, let's not deny that," chief economist Pier Carlo Padoan said. His comments came as:



- Italy had to deny it needed a bailout after being forced to pay 7.3pc to borrow money on the international money markets.



- Influential ratings agency Moody's warned that all European governments were in danger of having their ratings slashed.



- Germany's finance minister Wolfgang Schauble rejected calls for the European Central Bank to act as a "lender of last resort" in the eurozone.



- Mr Schauble also dismissed demands for jointly guaranteed eurozone bonds to relieve the pressure on the most heavily debt-strapped members of the common currency such as Greece and Italy.



In even stronger language, the Polish foreign minister appealed to the German government to act to save the euro. Rdoslaw Sikorski declared that the biggest threat to his nation's security was not terrorism, or German tanks, or even Russian missiles, but the collapse of the euro.



"I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity."



The OECD said the eurozone debt crisis and the threat of recession meant that there was a need for "a substantial relaxation of monetary con- ditions".



This is code for calling for cuts in eurozone interest rates. They said the eurozone had already gone back into recession.



But lower interest rates and more intervention in markets by the European Central Bank could kick-start consumer spending and restore confidence to the crisis-hit eurozone, it believes.



To halt the slide into financial meltdown the OECD threw its weight behind calls for the ECB to do more to end the crisis, before it's too late.



"Time is running out and every time we lose the occasion to act effectively the price or cost for having positive outcomes goes up," Mr Padoan said.



ECB governors are due to meet next week -- just days after Michael Noonan's first Budget. Over a year, a family with a €200,000 tracker mortgage would be €1,440 better off. That would go some way towards nullifying the €3.8bn tax and spending hits to come in next week's Budget.



Around 400,000 homeowners on tracker mortgages would automatically benefit from rate reductions but banks are not obliged to pass on rate cuts to those on variable rates.



A string of cuts in ECB rates is set to reignite the controversy over banks failing to cut variable rates. Four lenders -- Ulster Bank, Bank of Ireland, National Irish Bank and Start Mortgages -- refused to pass on this month's rate cut to variable rate customers.



Most lenders did pass on this month's ECB rate cut, including AIB, EBS, Permanent TSB, Irish Nationwide and KBC Bank.



Economist with Goodbody Stockbrokers Dermot O'Leary said ECB rates could fall as low as 0.5pc, which would imply another three cuts. Mr O'Leary expects a cut in December with another one early next year.



Alan McQuaid of Bloxham Stockbrokers said there was a 50/50 chance of a cut in eurozone rates next week.

Irish Independent

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