From an Irish perspective, there are two ways of looking at the European Central Bank’s latest quarter point rate reduction: one positive, the other negative.
The cut will ease pressure on borrowers here, instantly in the case of tracker mortgage holders.
The latter have benefited from three quarter point rate reductions and the special one-off adjustment amounting to an overall reduction of 1.10 per cent since June this year.
While borrowing costs are still elevated, the shift in the rate cycle is proceeding quicker than expected. And with the wider euro zone economy slowing on the back of a stuttering German economy and an expected fiscal consolidation in France, markets are pricing in four more rate cuts between now and March next year.
Fixed and variable customers here will have to wait on the somewhat sticky pass-through policies of domestic lenders to get the benefit.
Nonetheless the easing of borrowing costs will be cheered by indebted households which have been under the kosh from higher prices.
The negative aspect to the ECB’s latest rate decision, meanwhile, is that it will egg on house prices which are already rising at an elevated rate of 10 per cent year-on-year.
The latest official figures from the Central Statstics Office, published on Wednesday, indicate that prices rose nationally at an annual rate of 10.1 per cent in the year to August and at a rate of 10.8 per cent in Dublin.
It was the 12th consecutive month to see an increase in headline inflation, a worrying trend for prospective buyers.
While supply is an ongoing issue and a major driver of price growth, so are interest rates.
“The cost of finance is a key determinant of house prices so a lowering of the cost will inevitably result in higher prices,” Kieran McQuinn of the Economic and Social Research Institute (ESRI) said.
John McCartney, director and head of research at BNP Paribas Real Estate Ireland said the latest move will “add somewhat to the heat as it may encourage those who are not maxed-out on their loan-to-value and loan-to-income limits to take on more debt for home purchase.”
ECB monetary policy is understandably determined by the bigger economies but it has frequently been out-of-kilter with the domestic business and house price cycle here.
If you subscribe to the thesis that the Irish economy is dangerously close to overheating particularly in the wake of the Government’s latest giveaway budget, as the Irish Fiscal Advisory Council (Ifac) contends, lowering interest rates and boosting disposable income will only add fuel to the fire.
On the wider economic outlook, ECB president Christine Lagarde said she believed the euro zone economy was still on course for a soft landing.
“Are we still on a soft landing expectation? The answer is, on the basis of the information that we have, we certainly do not see a recession...so the euro area on the basis of what we have is not heading for recession,” she told the post-meeting press conference in the Slovenian capital Ljubljana.
This forecast contains two major downside caveats relating to the possibility of a wider war in the Middle East and the possibility a second Donald Trump presidency in the US, both or one of which could radically alter the current economic trajectory.
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