Hundreds of thousands of mortgage holders have been given an early and unexpected Christmas present by the European Central Bank, which cut its main interest rate to a new low of 0.25 per cent yesterday.
The cut in the benchmark interest rate follows a steady fall in the euro zone’s inflation rate, which dropped to 0.7 per cent last month. The reduction – the second this year – was made to stimulate growth.
Nearly 400,0000 people, or more than 60 per cent of the total home loan market, are on tracker mortgages and will stand to gain from the move.
For every quarter of a point the ECB lowers its rates, the monthly cost of servicing a €100,000 tracker mortgage falls by about €15, so the average tracker mortgage holder with an outstanding loan of €300,000 will see monthly repayments fall by €45 .
It is the fifth ECB rate reduction in the last two years and those with a tracker mortgage of €300,000 will pay about €225 a month less than they were paying in the autumn of 2011, an annual saving of €2,700.
While the cut will be automatically passed on to tracker mortgage holders, those with standard variable rate (SVR) mortgages will have to wait to see if their banks follow suit.
Balance sheets
Ciarán Phelan, the chief executive of the Irish Brokers' Association, said it was "unlikely that all banks would pass on the cut to those struggling variable rate mortgage holders as the cost of trackers weigh heavily on the bank's balance sheets".
The rate cut took markets by surprise but the head of the ECB, Mario Draghi, hinted that a further interest rate cut could be on the cards.
“In principle we could even cut further the interest rate,” he said, adding that the trend of low inflation will extend for “some period of time” and will be “extended and prolonged”.
Increased pressure
While a number of economic indicators in recent weeks had increased pressure on the ECB to act when it convened for its monthly rate-setting meeting, most analysts had expected a decision to be made next month. The euro fell to a seven-week low against the dollar on the back of the news.
The ECB has insisted that exchange rates are not a policy target but the strengthening euro in recent months has been worrying investors.
Maintaining price stability, and in particular keeping the inflation rate close to but below 2 per cent is the ECB’s primary responsibility. Mr Draghi denied the euro zone was facing a Japanese-style “lost decade” due to deflation. He also announced the ECB would extend the provision of cheap liquidity to banks until mid-2015.
Minister for Finance Michael Noonan welcomed the interest rate cut. "We wanted interest rates to go down and it helps our position going back into the markets because the spreads in Europe should narrow now," he said. "The interest rate reduction and the suggestion that the currency level might go down a little would both help our exports and help our economy to grow."
