| 14.4°C Dublin

Senior ECB chief dashes hopes for interest rate cut to 0.5pc

Hopes for a further rate cut for tens of thousands of Irish homeowners on tracker mortgages have been dashed as a European Central Bank member downplayed the possibility.

ECB executive board member Benoit Coeure said yesterday that policymakers may not cut interest rates further as confidence in the euro area's economic outlook is improving and inflation remains high.

Each 0.25pc cut in the ECB rate almost immediately reduces monthly payments for about 200,000 tracker mortgage holders in Ireland. There had been hopes for a further cut in the ECB base rate to just 0.5pc.

"At the current juncture, the jury is open as to whether there should be another rate cut," Mr Coeure said.

"It's not absolutely obvious that another rate cut would be necessary in light of recent economic indicators and in light of inflation developments. As you know, inflation developments at the end are what matters most for us."

The ECB this month raised its inflation forecasts for this year and next, even as the sovereign debt crisis is threatening to push the 17-nation euro region into recession.

Yet, details of a new bond-purchase plan unveiled by ECB President Mario Draghi earlier this month boosted financial markets and helped ease concerns about the severity of the economic slowdown.

Investor confidence in Germany, the region's largest economy, gained for the first time in five months in September and gauges of activity in the manufacturing and service industries rose more than economists forecast.

At the same time, countries in the European periphery are struggling with record unemployment, sluggish consumption and dwindling exports.

"Certainly the euro-area economy is weak," Mr Coeure said.

"Growth will be very weak in 2012 and 2013," he said, adding that the single-currency region has turned the corner "in terms of confidence and in terms of perception" and we now have conditions in place "ultimately to restore growth".

Bailout

While the ECB could "theoretically" cut its deposit rate below zero to add stimulus, it may not be feasible, Mr Coeure said.

"There are probably limits to the efficiency of further cuts in the deposit rates," he added.

Policymakers in July reduced the base rate to a record low of 0.75pc. That's sparked a debate about whether the ECB is willing to take interest rates into a territory few central banks have dared to venture.

Mr Coeure's comments on the interest rate come as markets continue to look to Spain this week amid persistent expectations that the country will embark on a full-blown bailout.

But German finance minister Wolfgang Schauble insisted on Friday that Spain did not require such a bailout on top of the assistance package it has already agreed.

Irish Independent