Business World

Thursday 17 October 2019

Relief as bank to cut home loan rate

ECB president Jean-Claude Trichet's press conference left some analysts feeling upbeat about possible interest rate cuts
ECB president Jean-Claude Trichet's press conference left some analysts feeling upbeat about possible interest rate cuts

Brendan Keenan and Charlie Weston

INTEREST rates look to be on the way down after the European Central Bank (ECB) yesterday paved the way for the first cuts in nearly five years.

As it dropped its previous threat to raise rates to combat inflation, some analysts said borrowers could benefit from a cut as soon as April.

The ECB left rates unchanged when its governing council met yesterday. But its president Jean Claude Trichet struck a noticeably softer tone in his statement and press conference after the meeting.

He stressed the risks to economic growth from the US slowdown and the global credit crunch.

Unlike last month, the council did not discuss a possible increase in rates.

Some analysts were upbeat about cuts coming sooner rather than later.

David Tilson, head of treasury at Bank of Ireland, said: "The ECB has effectively dropped its threat to raise interest rates."

He said there could be a 0.25pc cut in ECB rates in April. That would mean most borrowers paying 4.75pc -- down from the current 5pc. Mr Tilson also claimed that a cut next month could not be ruled out.

IIB Homeloans economist Austin Hughes said there could be three 0.25pc ECB rate cuts by the end of the year.

However, most analysts think it will be the second half of the year before borrowing costs start to fall.

"The eurozone economy is clearly slowing down, but it will probably be mid-year before we see the first move," according to John Beggs, chief economist at AIB Global Markets.

The ECB has changed its tune, despite inflation in the euro area hitting a 14-year high of 3.2pc.


Figures yesterday showed Irish inflation was just below the euro average last month, despite the faster growth in the Irish economy.

The ECB measure does not include mortgages, which take up a bigger share of household spending in Ireland than in other countries.

A cut in interest rates would therefore give a bigger boost to Irish consumer incomes and accelerate the fall in Irish domestic inflation.

Financial markets are betting strongly that ECB rates will be 3.5pc (4.5pc for borrowers) by the end of the year.

"There is a greater acknowledgment that risks to growth are on the downside," said David Owen, chief European economist at Dresdner Kleinwort in London, who also predicts two 0.25pc cuts by year-end.

"The ECB's not going to cut in the next couple of months, but it is starting to prepare the markets for rate reductions."

The ECB development unfolded as new figures claim secondhand house prices have fallen by 20pc, with new houses down by 10pc.

The report by analyst Killian Jones for Merrion Stockbrokers found that most housebuyers and sellers now consider that ECB rates will not go any higher.

He said those prepared to cut the prices of a house on the market were selling them quickly.

But those refusing to accept that the housing market had changed and who would not drop their prices were not shifting their properties.

It was also predicted that new-house prices would dip further before the end of the year to match the falls of second-hand homes.


They carried out a survey of estate agents and found that 77pc of them reported an increase in buying and selling.

But it was not all good news yesterday, as Bank of Scotland said it was increasing the interest rate it will charge some new mortgage customers from next March.

This follows moves by Bank of Ireland, AIB, Ulster Bank, IIB Homeloans and Permanent TSB to increase the rates it charges new customers.

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