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Pressure on ECB to cut rates as eurozone output falls

THE pressure on the European Central Bank (ECB) to cut rates next month intensified yesterday after output again shrunk in the eurozone.

Share prices rose in the US and across Europe for the third day. Bond yields dropped and the euro currency fell as speculation mounted that the ECB will be forced into cutting its key lending rate.

A new rate cut could come as early as Thursday, May 2, in a bid to fuel growth in the currency zone.

Justin Doyle of Investec Bank in Dublin said: "Comments from several ECB governing council members about falling inflation and lower future growth prospects in the eurozone suggested the central bank is definitely considering a cut in its main refi rate, which stands at a record low 0.75pc."

The prospect of a rate cut was boosted as new figures showed activity in the eurozone's services and manufacturing sectors continued to fall in April. The survey indicated that even in Germany output is declining.

Markit's composite purchasing managers' index (PMI) for the eurozone remained at 46.5 in April, unchanged from the month before.

Alarm

A reading below 50 indicates shrinking activity. The survey suggested that German private sector output fell for the first time since November last year.

The prospect of a rate cut sent the euro below the psychological threshold of $1.30.

Meanwhile, a flash US manufacturing PMI reading showed activity slowing in April, while an earlier China PMI reading also rang alarm bells.

A further 0.25pc fall in the ECB's main lending rate would be a massive boost for the 375,000 homeowners with tracker mortgage rates.

The interest charged on these mortgages has to come down whenever the ECB rate reduces. A cut would come at a time when property tax bills are popping through letterboxes.

Each 0.25pc reduction would ease monthly repayments by €15 on every €100,000 of debt.

A cut of 0.25pc would mean monthly repayments on €300,000 tracker mortgage would come down €444 a year.

The average tracker rate is around 1.25pc above the ECB rate – around 2pc. Banks would find it impossible to again push up variable rates. These rates can be moved by banks at will.

Next week the ECB has its regular monthly monetary policy meeting, with eurozone rates currently at 0.75pc.

Irish Independent