Bonus as ECB vows to cut interest rate to zero
375,000 with trackers to benefit as borrowing rates hit new low
THE European Central Bank has surprised markets with a rate cut and pledged to slash interest rates to zero if the eurozone economy continues to flounder.
Some 375,000 homeowners with tracker mortgages here are in line for a pre-Christmas boost after a dramatic cut in rates to just 0.25pc.
But the record low interest rate spells bad news for savers and those with variable mortgages could see further rate hikes as banks attempt to recoup their losses.
ECB president Mario Draghi, who has now cut rates five times, signalled that he had not finished yet and could set the rate even lower.
He said that he would flood Europe's banks with potentially unlimited quantities of cheap credit for at least another 18 months in order to prevent the eurozone's recovery from stalling.
"We could even cut further the interest rate," he told a news conference in Frankfurt after the ECB halved its main refinancing rate to 0.25pc.
Mr Draghi went on to say that he also had other tools in the ECB arsenal that could be used in the months ahead, while insisting that the eurozone was "not there yet".
Extra credit will force banks to lend more to people and companies. The US Federal Reserve and the Bank of England have already tried the same recipe with mixed success.
For homeowners, this latest cut is set to be reflected in the payments due on December's tracker mortgage repayments.
Bank of Ireland said its trackers would move on November 13.
Every 0.25pc reduction in the ECB rate means tracker mortgage holders have to pay €13 less in repayments on every €100,000 borrowed.
A family on a €200,000 mortgage will save €300 over a full year – this will more than cover the cost of the property tax for most people.
Karl Deeter of Irish Mortgage Brokers has calculated that the succession of cuts since 2008 has reduced repayments on a €250,000 mortgage by around €640 a month – around €7,700 over a full year.
Finance Minister Michael Noonan hailed the rate cut.
"It is a good decision. We welcome it. We wanted market rates to go down," he said.
He said lower interest rates would help exporters by reducing the value of the euro, so making exports more competitive. The decision would also help the economy to grow.
Mr Noonan also ruled out suggestions from troika sources that some sort of deal was needed to force those with tracker mortgages to pay more.
At present, banks are unable to recover the cost of lending to those with trackers. That means those with variable mortgages often have to pay more, something the troika believes to be unsustainable.
But Mr Noonan said there was no question of the terms of trackers being changed.
"That would be illegal. They have the protection of contract law," he said.
However, those with variable rate mortgages will continue to pay more as they are unlikely to see the latest rate cut passed on. Lenders would only say they were keeping variable rates under review.
The gap between the rates for those on trackers and those on variable rates has widened to more than €400 a month with the latest cut.
A family with a €250,000 tracker mortgage over 25 years will see monthly repayments at €970, presuming the tracker is set at 1pc above the ECB rate.
If a family has the same sized mortgage on a typical variable rate, they will be repaying €1,375 a month.
However, Michael Dowling of the Independent Mortgage Advisers' Federation, said banks were unlikely to impose more rises on variable customers.
With average variable rates at 4.5pc, they were now at a level where banks were able to make a profit on them, he said.
However, savers were warned to expect more cuts in deposit rates. Banks have been cutting the interest on savings for 16 months now, with many paying as little as 0.01pc on deposits.
Official figures also show that prices have finally stopped rising. Prices rose by just 0.1pc in the year to October, the Central Statistics office said, reflecting falling mortgage rates and energy prices.
The governors of the European central banks are trying to kick-start the eurozone economy after a string of indicators showed sluggish growth.
"The fact that the ECB acted today and that it stressed it is willing and able to ease further if necessary are today's key headlines," said Dublin-based economist Austin Hughes of KBC Bank.
Instead of worrying about prices rises – which is the main concern of the ECB – there are now fears that inflation is so low that it will turn into deflation, where prices keep falling, prompting consumers and businesses to spend even less.
The ECB also said banks would be able to rely on as much liquidity as they needed for longer in an effort to prevent the eurozone's recovery from stalling.
The 23-man Governing Council had faced intense market scrutiny after a shock slump in eurozone inflation to 0.7pc in October – far below the ECB target of just under 2pc.
President of the Irish Exporters' Association Colin Lawlor welcomed the cut. He said it would stimulate growth in the EU area, where most Irish exports go and would help make exports to the US more competitive.
Small business lobby group ISME called for sanctions to be imposed on banks that do not pass on the latest cut to lending rates for companies.