Saturday 20 January 2018

ECB hints at interest rate cut to below 1pc

Charlie Weston Personal Finance Editor

The chief of the European Central Bank yesterday hinted strongly that the bank will cut interest rates in July below the 1pc level -- a historic low.

This would be a massive boost to 400,000 homeowners on tracker mortgages, and some banks are likely to pass on any reduction to those with variable rates.

However, a move to cut interest rates would be in reaction to turmoil in the eurozone. Financial markets are looking to the ECB to take decisive action to tackle the eurozone crisis, which risks spiralling to a new intensity after Greek elections tomorrow.

The comments by ECB president Mario Draghi came just days after other ECB policymakers said the central bank might be open to cutting interest rates. The ECB left its main interest rate at 1pc at the beginning of this month.

"There are serious downside risks here," Mr Draghi told an ECB conference in Frankfurt yesterday. "This risk has to do mostly with the heightened uncertainty." He added that inflation expectations were well anchored and "there is no inflation risk in any euro area country".

Mr Draghi's comments reinforced economists' expectations for the bank to cut rates soon.

KBC Bank economist Austin Hughes said a rate cut next month was the most likely outcome.

Inflation in the eurozone was down again and central banks in Britain, the US, China and Australia were also taking action to avoid a global downturn sparked by the eurozone crisis.

"Given that Europe is the centre of the problems, it would be extraordinary if the ECB did not play its part in solving the problem," Mr Hughes said.


Around 400,000 tracker-mortgage holders would benefit directly from a rate cut. 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 mortgage would save €360 a year from a new rate cut.

But more than 255,000 households with expensive variable mortgages will be at the mercy of their banks when it comes to passing on any cut.

However, there have been some positive signs for variable-rate mortgage holders. Last month, Permanent TSB cut its rate by 0.5pc to 4.69pc after coming under sustained criticism from customers.

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

Irish Independent

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