Charlie Weston: More treats, fewer tricks as ECB's Trichet retires
Published 01/11/2011 | 17:00
IT seems appropriate that the president of the European Central Bank, Jean-Claude Trichet, ended up retiring on Halloween.
After all, his critics were quick to note, during his tenure the eurozone became a "house of horrors".
Today the Frenchman is replaced by Italian Mario Draghi, with expectations that one of the major announcements from the new man in Frankfurt will be a cut in interest rates.
The expectation is that the rate reduction will come in time for Christmas.
Cutting rates was something that was fiercely resisted by the now-departed Trichet.
Few countries are more sensitive to interest rate movements than this one.
Mortgage repayments make up a huge chunk of the household budget, particularly for those boom buyers who have been dubbed "the negative equity generation".
This is because less than a quarter of those with a home loan are on fixed rates, and therefore unaffected by eurozone interest rate mortgages.
A cut would benefit 400,000 people on tracker mortgages, as the rates on these home loans have to automatically change when ECB rates change.
An ECB reduction would also mean pressure would come on lenders to pass on any cut to more than 200,000 homeowners who have variable mortgages.
Rising interest rates have been one of the reasons one in eight mortgage holders are struggling to meet their repayments, even after many have agreed deals with their lenders to vary the repayments.
But little, if any, of this cut any ice with the now former ECB president Mr Trichet.
Over his eight years in charge he was constantly at pains to stress that the mandate of his bank was about keeping inflation low in the eurozone.
Prone to dismiss suggestions that a rate cut would help struggling eurozone countries like Ireland, Portugal and Greece, he often stressed that the ECB had to look across 17 countries with 330 million residents.
"We may be hurtling over the cliff, but I have my orders to keep driving straight, even if that means falling down a precipice," seems to have been the mantra.
And he won few friends here when it was revealed he directly "threatened" former Finance Minister Brian Lenihan with the immediate withdrawal of emergency liquidity funding unless he accepted the bailout last November.
There is also particular annoyance that a payment of €700m will be made to unsecured and unguaranteed bondholders of Anglo Irish Bank this week, largely at the insistence of the ECB.
Now the ECB is about to do a U-turn and reverse a series of interest rate hikes that it began in April.
And it is not the first time that the ECB has been forced to abandon a rate-hiking policy. At the start of the global credit crisis, in mid 2008, it raised rates as the world careered into an economic car crash.
With Mr Trichet at the helm, it was forced to slash rates when Lehman Brothers collapsed. Now it has been forced into another about-face.
While this is good news for homeowners in this country with big mortgages, this about-turn on interest rates is being implemented because the eurozone continues to battle to stave off collapse.
The scary Mr Trichet failed to recognise that the eurozone is only as strong as its most-exposed members.
As the Italian moves into the top spot, it is thought he will be more aware of the need to direct his attention beyond a narrow focus on inflation. However, Mr Draghi won't want to rush to any decision to relax interest rates, for fear of being accused of acting purely to dig out his fellow Italians.
That would play badly in Germany, the country that is, after all, the paymaster of the eurozone.
But as a former head of the Italian Central Bank, Mr Draghi is known to have a more broad based appreciation of the problems of the eurozone than his predecessor.
This means that those expecting an announcement on Thursday from the governing council that rates are set to fall immediately are likely to be disappointed.
Mr Draghi will bide his time. But a rate cut is still highly likely before Christmas.
In a recent Reuters news agency poll of 70 economists across Europe, around two-thirds predicted a rate cut by December and 11 said it would happen this coming Thursday, when the ECB meets.
Some ECB governing council members wanted to cut rates last month, while others think they can stay at 1.5pc for now.
Pressure for a cut intensified yesterday after top international think tank, the Organisation for Economic Cooperation (OECD), called for a cut in eurozone rates.
The Paris-based OECD said interest rates should be reduced to boost growth in the eurozone. The think tank is eager for the currency zone to stave off what it fears will be "patches of negative growth" in the eurozone area unless more is done to stimulate growth.
"In the advanced G20 economies, interest rates should remain on hold or, where possible, be reduced, notably in the eurozone area," the think tank said.
This is useful cover for Mr Draghi.
The hope now is it will be good riddance to scary Trichet and the ECB will be less frightening and more calming under the new man.
Homeowners here will certainly be banking on more treat and less trick.