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Thursday 21 September 2017

Q&A: Eurozone interest rates

Michael Noonan
Michael Noonan
Charlie Weston

Charlie Weston

Q&A

THE move to cut eurozone interest rates is an attempt to stimulate the EU economy, but the decision is set to have different impacts on different groups of people.

Q Why is the ECB cutting rates?

A Huge pressure has come to bear on the European Central Bank in the past few weeks to do something to revive the flagging eurozone economy.

This follows a string of disappointing economic indicators, prompting fears the eurozone could be entering a deflationary phase. This is where prices keep falling and the confidence of consumers and business gets so zapped that they curtail spending even more.

Inflation dropped sharply last month to 0.7pc – well below the ECB's target level of 2pc.

Also, unemployment remains stubbornly high in the 17 nations that use the euro currency.

Q What does it mean for tracker holders?

A The cut in ECB rates from 05pc to 0.25pc is a massive boost for homeowners who have a tracker, coming just ahead of the high-spending Christmas period.

With a tracker the deal is that the rate is at a set percentage above the ECB rate, and moves up or down when the ECB cuts or hikes its main lending rate.

A family with a tracker for €200,000, set at 1pc over the ECB rate, will end up pay around €25 less next month on their mortgage.

Over a full year, the saving will amount €300.

This will cover the cost of the unpopular property tax.

Q What about variable rate mortgage holders?

A The news here is not so good. Banks are very unlikely to pass on the latest cut to those with variable, or loan-to-variable rates. The only positive is that variable rates are now, on average, around 4.5pc. This is a level at which banks are starting to make money on these loans, so are unlikely to push up variable rates again.

Q I am a saver. This is bad news, isn't it?

A Savers are an endangered species at the moment, and are being attacked from all sides.

Banks have been cutting the interest rates they pay to savers for a year and a half now.

The Government decided in the Budget to push up savings tax to 41pc from next year.

And some people who have not previously paid PRSI (Pay Related Social Insurance) on savings interest will end up paying it from next year.

Q Will the move help businesses?

A The move to cut ECB rates should make our exports more competitive as it also should mean that the euro currency falls against the US dollar, British sterling and the Japanese yen.

And businesses will hope that cheaper money for banks will be passed on to them in the form of lower lending rates, which is the overall objective of the ECB rate cut move.

Irish Independent

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