Tuesday 16 January 2018

New mortgage rate cut to save families €360

Getty Images
Getty Images
ECB president Mario Draghi. Photo: Getty Images

Charlie Weston and Thomas Molloy

THE European Central Bank will cut interest rates to a record low within weeks as it desperately tries to kick-start the flagging EU economy, analysts predict.

The cut of 0.25pc could come as early as next Thursday, plunging interest rates to a historic low of 0.75pc.

Around 400,000 tracker mortgage holders would benefit directly from such a reduction that the markets are now beginning to factor in as likely.

Each 0.25pc cut in ECB rates means monthly savings of €15 for every €100,000 borrowed. This means that a family with a €200,000 tracker mortgage would save €360 a year from a new rate cut.

Tracker mortgages are fixed at a certain level above the prevailing ECB rate.

But a reduction would also put pressure on banks here to cut their variable mortgage rates, which have not fallen in line with the ECB rate.

The ECB meets next week, with analysts saying that if it does not cut then, it will be highly likely to cut in July.

While any rate cut will be good news for mortgage holders, such a measure would also show that the ECB believes Europe's economy is now in real trouble.

That means the problems in Spain, Italy, France and the rest of the eurozone could yet be far more damaging to the Irish economy than any benefits that will come from cheaper mortgages.

Predictions of a cut came as new figures show that eurozone inflation has fallen back to a 15-month low. The fall was more than had been expected by experts.

The interest rate that banks charge each other for lending is also now at its lowest in two years.

Markets have begun to place bets on a rate cut in the past few days as the eurozone's economy teeters on the brink of recession.

Economists have shifted from ruling out another rate cut to saying they expect at least one 0.25pc cut in this summer, with a strong chance of the reduction coming as early as next week.

A huge fall yesterday in the interest rate banks charge each other for lending was adding to pressure for a cut.

Austin Hughes of KBC Bank said: "Because of the scale of the economic problems in Europe, the pressure for a rate cut is building. This means there is a decent chance we will see one before the end of the summer."

The International Monetary Fund urged the ECB to cut interest rates further, while continuing to use so-called "unconventional policies" to boost growth in the eurozone.

And Goodbody Stockbrokers economist Dermot O'Leary said he believed there was a good chance of rates coming down in July. He said the eurozone banking officials would want to see the outcome of the Greek elections on June 17 before taking any action on rates.

Inflation

"I would see a rate cut in July because of the weakness of the economic data in the eurozone. We are now seeing a more prolonged and deeper recession than we saw previously."

Consumer price inflation in the 17 nations sharing the euro fell to 2.4pc in May from 2.6pc in April, the EU's statistics office Eurostat said. This was the lowest level since February 2011 but is still above the ECB's target of close to, but below, 2pc.

If the ECB does cut interest rates, it will be the first time in the 13-year history of the bank that the main benchmark rate will fall below 1pc. The last cut in ECB interest rates was in December.

While around 400,000 people with tracker mortgages would enjoy a reduction in their repayments, more than 255,000 households with expensive variable mortgages would be at the mercy of their banks when it comes to passing on any cut in the ECB rate.

However, there have been some positive signs for them. Earlier this month, Permanent TSB cut its rate by 0.5pc to 4.69pc after sustained criticism from customers.

It is now expected that it will again cut its variable rate for its 80,000 variable rate customers by the end of the summer. Lower deposit rates for savers mean the bank is in a better position to fund mortgage-rate reductions.

Irish Independent

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