ECB will slash, not raise interest rates claims economist
THE European Central Bank is now likely to cut interest rates, rather than raising them, over the next few months, a leading economist claimed yesterday.
And a fall in interest rates could be the best chance of avoiding financial ruin for thousands of consumers who have over-borrowed in the past few years, IIB Homeloans economist Austin Hughes said yesterday.
One in 10 borrowers, or up to 60,000 people, are so heavily indebted that they face serious financial consequences if rates keep rising.
Confidence among all consumers towards the housing market has hit an 11-year low, with one in five homeowners fearing a housing crash, a survey undertaken for IIB Homeloans found.
These fears were keeping large numbers from buying houses.
Mr Hughes said the fall in consumer confidence was now the biggest threat to the housing sector in Ireland.
However, the economist said he expected US interest rates to fall next week and the strong likelihood was that European rates would follow suit.
Even if European mortgage rates rise again by the end of the year, they should start falling next year, he said.
Last week borrowers were relieved when the European Central Bank decided to hold off on a promised rate rise, in a bid to calm international money markets which have been hit hard by a global credit crunch. The ECB did not rule out raising rates later this year, with some economists expecting a hike in December.
But Mr Hughes dismissed fears of more rate rises.
"A further rate rise is most unlikely because economic growth in the Eurozone is softening. And fears about inflation in the eurozone are overdone. You can't entirely rule out a rise, but I don't think it is going to happen. The bad news on borrowing costs is coming to an end."
However, this view is in contrast to public pessimism about rates.
Mr Hughes revealed that a survey carried out for IIB Homeloans found that seven out of 10 people expect rates to rise between 1pc and 2pc in the coming months.
Large numbers of people also expect house prices to fall. Some 59pc of people expect a fall of between 5pc and 10pc in house prices.
Mr Hughes argued that low levels of confidence in the housing market were misplaced. This was because interest rates rises were coming to an end, while house completions have fallen dramatically.
"House prices won't collapse as house completions have fallen right back. This means you are more likely to see low levels of construction activity than low levels of house prices."
Mr Hughes said the Government should increase mortgage interest relief to ensure there is no unnecessary hard-landing.