INTEREST RATES in the euro zone are increasingly likely to be lowered to 1 per cent by the middle of the year, economists predicted yesterday after the European Central Bank (ECB) slashed its forecasts for economic growth and inflation by a far larger margin than had been anticipated.
The ECB yesterday cut interest rates by half a percentage point to 1.5 per cent, an all-time low, with ECB governing council president Jean-Claude Trichet saying the decision was made by consensus rather than being unanimous. This indicates the governing council was split on how much to cut rates.
Speaking at a press conference in Frankfurt, Mr Trichet said inflation in the euro zone would come in under the ECB’s price stability goal of below but close to 2 per cent both this year and next, while it forecast that the euro-zone economy would shrink by as much as 3.2 per cent this year.
Mr Trichet dodged questions about when it might cut rates further, or how low it could go on interest rates.
ECB governing council member and head of the German Bundesbank Axel Weber told German television station Ard there was scope for further rate cuts. He added that interest rates needed to be pushed back up as soon as the economic situation improved.
Mr Trichet said the ECB was studying all options and had not excluded non-conventional measures to keep prices stable.
However, the ECB’s caution in relation to the use of quantitative easing measures was criticised yesterday. Paul Niven, head of asset allocation at FC Investments, said the longer the ECB delayed agreeing its next steps in tackling the crisis, the greater the eventual cost to the euro-zone economy.
Most Irish mortgage lenders passed on the ECB rate cut to variable mortgage customers yesterday, although Ulster Bank group said it was reviewing its decision and National Irish Bank said it would not be passing on the cut.
Diarmuid Kelly, chief executive of the Professional Insurance Brokers’ Association, said the rate cuts would boost the subdued mortgage market, while business group Isme warned Irish banks to immediately pass on the rate cuts to small business customers that were “still feeling the downdraft from the credit crunch”.
But the series of rate cuts may be nearing an end. “In our view, a 1 per cent policy rate would probably represent the end point of the rate-cutting cycle,” said Simon Barry, economist at Ulster Bank. – (Additional reporting: Bloomberg, Reuters)
